Page last updated at 00:13 GMT, Tuesday, 18 November 2008

Cash flow drying up for Indian small firms

By Neil Heathcote
Editor, India Business Report, BBC World, Pune

Mojj Engineering Systems
Mojj Engineering Systems have had to delay expansion plans

Madhu Gupta has a problem.

His company, Mojj Engineering Systems, makes large-scale equipment to go into food and chemical plants.

But his customers keep calling up to say their own projects are on hold, so they don't need the machinery they've ordered, at least not yet.

In fact, most want a discount on it, or to take it on credit.

For the past few weeks, the work has been piling up in the yard outside. Now he's running out of space.

"Three months back we had no idea that things could happen like this," says Mr Gupta. "It was too sudden to prepare for it."

He has already held a meeting with his workforce to explain why their work is being shuffled around the yard to make more space, rather than being delivered.

It is a temporary problem - but it is still a serious one.

'Stopped everything'

Mojj has already paid for all the raw materials. It won't get that money back until the machines are delivered.

Anil Bhardwaj
If the liquidity crunch continues and the slowdown deepens, there is bound to be a steep rise in business failures
Anil Bhardwaj, Federation of Indian Micro, Small and Medium Enterprises

The funds it was planning to invest in a new factory down the road are now being used to tide it over during the crisis.

"We had expansion plans," says Madhu Gupta. "We've bought the land, the building plans are ready, but now we have stopped everything."

He doesn't blame his customers. They, too, are finding it hard to raise money for their own projects, he says.

A similar story is being played out across the country.

Big firms are drawing in their purse strings, and the first to feel the impact are the thousands of small and medium sized firms that supply them.

Seeking help

Two hours drive away in Kulgaon, TU Shenava faces similar problems at his pipe-making factory.

He's paid for all his copper and brass up front - only to find that he's left holding a lot more stock than expected.

Industrial Tubes Manufacturers, Kulgaon
Industrial Tubes Manufacturers in Kulgaon has had to cut production

Metal prices have now plunged, and so have the prices he can charge.

"We're almost at the point of reducing production by 40 or 50%," he says.

"We hope things will improve and not become worse. Anything more than this will not be manageable. And even this cannot be manageable for a long period."

Now he's talking to his bank to see how they can help.

"The government keeps on saying that they're encouraging the banks to lend more to industry, so now we'll be testing it," Mr Shenava says.

The companies with a good track record, and good relations with their bankers will be best placed to survive. Others may not be so lucky.

The Federation of Indian Micro, Small and Medium Enterprises points out that this is not a good time to be asking for money.

"Small and medium sized enterprises have become the first victim of banks tightening the noose on the flow of funds," says Secretary General Anil Bhardwaj.

"If the liquidity crunch continues and the slowdown deepens, there is bound to be a steep rise in business failures."

New strategies

Small firms are the second largest employer in India after agriculture.

Many companies are now revising their strategies so they don't get caught like this again.

For TU Shevana, this is also a time of opportunity.

He is planning to use the slowdown in his workload to modernise his factory.

He wants something that will impress overseas buyers, so that he can take advantage of the upturn when it comes.

Providing, of course, his bank is happy to lend him some money.

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