Why almost 5,000 Gujarat MSMEs have closed down in less than 5 years

Micro, Small, and Medium Enterprises (MSMEs) in Gujarat appear to be battling an existential crisis.

Having still failed to recover from the twin blows of demonetisation the COVID pandemic, the textiles and chemicals sectors in the state are facing a fresh crisis following the political turmoil in Bangladesh.

Industry leaders say that issues like cash flow, lack of access to credit, loss of demand as well as the Gujarat government’s low utilisation of Central funds to the sector have compounded the problem.

Thousands of units shut

Although the Bhupendra Patel government in the state claims it has been consistently focusing on developing the sector, a whopping 4,974 MSMEs have shut down since July 2020.

“The aftermath of the pandemic, followed by low demand due to the Russia-Ukraine war and inflation, has had a crippling impact,” Pathik Patwari, Chairman of the Indian Chamber of Commerce in Gujarat, told The Federal.

“The textiles, chemicals and steel sectors were hit harder due to the recent Bangladesh unrest,” he added.

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Lack of credit

According to him, a large portion of MSMEs in Gujarat do not have access to formal institutional credit due to which they struggle with cash flow issues. The pandemic and the rising inflation have squeezed them dry.

When the Union government came up with a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme to tackle cash flow issues, several enterprises couldn’t avail of the benefits as they did not have banking facilities.

“This caused many of them to either shut shop or diversify, further impacting the sector,” said Patwari.

Cheap Chinese imports

Almost 35 per cent of stainless steel MSMEs in Gujarat closed in the second quarter of the financial year 2023-24.

According to industrialists, cheaper Chinese imports are impacting the profit margins of domestic stainless-steel manufacturers, causing many to shut down.

“Gujarat accounts for 80 per cent of the steel MSMEs. Naturally they are the most hit by a heavy influx of cheaper Chinese imports. This led to almost 30-35 per cent of steel manufacturers in the state to shut shop in the July-September quarter last year," said an industrialist.

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Government’s failure

“They are bearing the brunt of the Union government’s decision to remove duty on steel imports since 2021. Since then, most MSMEs are operating on a smaller scale while others have become traders,” said Rajamani Krishnamurti, President of the Indian Stainless Steel Development Association (ISSDA).

He said China gives a lot of subsidies due to excess production. But it doesn’t have an adequate domestic market. So, when India removed duty on steel imports, the country was quickly swamped by Chinese imports.

Since 2021, out of the 80 induction furnaces that manufactured stainless steel in Ahmedabad, 20 have closed.

Textile industry

The situation in the textiles sector is just as bad. It had been hit by recession since 2017 following the implementation of the GST regime, claim industry representatives.

Champalal Bothra, President of the Federation of Textile Traders Association, said the GST regime and demonetisation affected the textile trade in Surat the most.

“We did not get time to recover as the pandemic followed soon after. As a result, the production has fallen by nearly 40 per cent,” he told The Federal.

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Bangladesh factor

Also, in 2017, the textile market in Surat was closed for over 20 days to protest against GST. In those 20 days alone, the industry suffered a loss of about Rs 10,000 crore. About four lakhs jobs were lost.

Many traders closed business and sold power looms in scrap. “I had 118 power looms and a thriving business and post GST I was down to 38 looms,” said Bothra.

Now, the turmoil in Bangladesh is posing as a new threat to the sector.

“We export yarns and textile of around Rs 100 crore monthly to Bangladesh. This has slowed…Those who survived the pandemic are trying to diversify their business into the semiconductor industry,” Bothra further said.

Exports too hit

The situation in Bangladesh has also hit the chemicals sector. The dye makers are the worst affected.

“If the turmoil continues, it will put the chemical industry in Gujarat in a very challenging position,” Nilesh Damani, Vice-President of the Gujarat Dyestuff Manufacturers Association, told The Federal.

Gujarat exports 3,500-4,000 tonnes of reactive dyes to Bangladesh every month that is worth Rs 1,500 crore. If this demand stops or reduces significantly, the units in the state will be in a dire situation.

"The industry has struggled with low international demand post the Russia-Ukraine war,” Damani added.

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Production slashed

Around 250 manufacturing units of reactive dyes out of 674 units in the Vatva Gujarat Industrial Development Corridor (GIDC) in Ahmedabad have halved their production since 2024.

Despite accounting for 80 per cent of the country’s MSMEs, the Gujarat government has the lowest utilisation of Central government grants.

A state government report says Gujarat has only used Rs 0.66 crore of the Rs 5 crore allocated for the Strategic Investment Plan (SIP) for MSMEs as of June 30, 2024.

Non-utilisation of funds

Also, the state government has failed to utilise any fund from the Raising and Accelerating MSME Performance (RAMP) scheme of the Union government in the last financial year.

Both the SIP and RAMP programmes were launched by Prime Minister Narendra Modi in 2022 to help MSMEs improve market access and scale up guarantees to women-owned units.

Despite the government’s push to attract MSMEs to the semiconductor industry, most that took a step forward have subsequently backtracked.

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MSMEs struggling

“While the state has successfully attracted Tata Electronics in the new sector, MSMEs are yet to show significant involvement,” Sandip Sagala, the MSME Commissioner, told The Federal.

Many traders in the MSME sector had shown interest in diversifying into the semiconductor sector hoping for greener avenues. However, the requirement of a minimum investment of Rs 50 crore to set up the outsourced semiconductor assembly and test plant forced many to take back their initial investment.

A company moans

Suchi Industries, a Surat-based textile firm, is one of the many textile companies to have ventured into the semiconductor industry in 2024. It set up a unit called Suchi Semicon.

“Our applications are still under review,” said Ashok Abhaybhai Mehta, Managing Director of Suchi Semicon and son of Abhaybhai Mehta, who heads the textile firm.

“We are still hanging on and applied for bank loans and looking for private investors," he told The Federal.