Lack of emergency fund is the most significant issue for MSMEs: H M Arif.

H M Arif the Managing Director of Canara Paper Products is in the business of corrugated box Manufacturing Unit through the usage of Kraftspaper. Arif is also the Senior Vice President of Peenya Industrial Association. In a freewheeling conversation with, he discusses the industry's challenges, automation and future outlook.

Arif believes the most significant issue that micro businesses face is lack of an emergency fund, getting liquidity capital on hand is critical to running the company smoothly and efficiently. He believes Financial planning is abysmal and it is important to increase an individual’s net worth. Edited Excerpts:

The Record GST Conundrum

The GST collections for March 2021 were the highest recorded GST collections. Arif explains the current inflation rate is bound to make the collections record high but businesses have been at volumes of 50% as compared to previous years. He said, “The GST rate of 12% that I pay on 39,000 is nearly 70% higher than what I paid the previous year on Rs. 22,000 per tonne. With this, you will undoubtedly be able to produce record-breaking results.”

The Struggle of SMEs

SMEs have been operating on a daily basis as compared to large corporation who prepare for long term. Micro-entrepreneurs have been asking for a central marketplace to market their products to end consumers using a particular brand name. Arif says, “Though I sell a product, it is solely based on orders received and thus is purely B2B business. A portal can be formed if the central government takes initiatives to enable small businesses to brand their goods and sell them in the market. The end user can also save money on branded goods as a result of this. Of course, service, quality, and credibility are important, but unless and until small businesses are given the necessary boost, the cost of products for the average consumer would be higher as well.”

Future & Automation

Large enterprises are making inroads where small manufacturers exist with help of large automation technologies allowing them to manufacture at a bulk volume and low cost. Arif says, “Previously, these companies were only interested in larger orders; but, with the help of new technology, they are now able to reduce product change-over time to a bare minimum, allowing smaller orders to be accepted, which is harmful to the smaller companies in the long run. Their production would also be superior to that of current manufacturing. The MSME would gradually fade away. Individuals with the ability to invest and conduct business will remain important.”

The usage of Automation 

Why do businesses want automation? Is it largely due to labour issues? For me, the minimum per kg labour cost is Rs. 3.75 to Rs. 4.00, and for businesses that automate, the cost is Rs. 1.50 per kg labour cost. Our profit margin is also shrinking by the day. 

Due to environmental concerns, wood pulp is prohibited in India but every year, our requirements increase by 7 to 10%. Since the process involves recycling, only 80% of it is recycled, resulting in a 20% loss each time. In China, large paper mills are also closing. India exporting the finished product allows businesses to take advantage of the import export duty, additionally the LC ensures that payments are credited within 45-60 days which is not the case when you do business in India. Last year, paper exports from India to other countries accounted for just 8% of total Indian consumption. However, it has risen from 8% to 26% this year, so you measure the rise in raw material requirements. In India, this 18 percent will lead to scarcity. Price increases are also caused by scarcity. We buy and sell with large companies, so we have very little control about the price. Every month since September, there has been an increase of Rs. 2,000 per tonne, and in eight months, we have a rate increase of Rs 16,000-17,000, which I do not get from my client. The liquidity or working capital problem is serious.  

The handing over of Baton

In reality, Arif believes that the next generation will be disinclined to enter the company because they see their parents struggle every day. His father started this company and all his three brothers are in packaging, but as the situation changes, this will no longer be the case. In 1985, the first unit in Mysore was created. When he joined the business in 1989, he was buying paper for Rs. 8,000 per tonne and selling it for Rs. 16,000 per tonne, resulting in a 50 percent profit margin and a conversion cost of less than Rs. 3,000, leaving him with a margin of Rs. 5,000 per tonne and against advance payment.

Arif explains, “What happens to my profitability today if one of our vendors is liquidated? Also, we have filed a few cheque bounce lawsuits, but in our system, a cheque bounce case also takes three years to hear. What do we get if we file a formal lawsuit against a non-paying vendor, aside from losing the business and having to pay more for hiring lawyers with no guarantee of success? The vendor never appears in court; only his lawyer does; each time I am made to appear as a suspect, I take the oath of promise that everything I am saying is right, and I attend the court during the trial.  Also, if you win the case, we are expected to file another case for the execution of the verdict along with the proof of the vendor’s assets. If there is no property to attach, they are imprisoned, which exacerbates my dilemma because the chances of recovery become zero. Our system’s vulnerability is being used cleverly.”