The report examines empirical evidence to analyse the impact of the global economic crisis on workers and micro enterprises in the informal sector in the engineering industry in Rajkot and Coimbatore.

Engineering Sector in India: Multi-Product and Multi-Scalar

The recent recessionary trends began during the first quarter of 2007- 08 and resulted in negative growth in the manufacturing sector, during the October to December 2008 period. The situation was further aggravated in the wake of the intensification of the global financial crisis that hit most export-oriented industries in India. The engineering industry represents one such case, though the impact in this sector has been relatively less severe than in several other export-oriented industries (that produce consumer goods such as automobiles, textiles, diamonds, garments, leather manufactures) and in the construction industry.

The engineering industry is characterized by wide-ranging products and has a spatially diversified nature. The sector consists of a large number of intermediate and capital goods industries, and therefore, has significant backward linkages with many vital sectors in the economy, including agriculture (Morris, 2006). The sector is also characterized by a fairly long value chain, entailing a number of processes namely foundry, casting and forging, machining, parts and component manufacturing, assembly and transport, etc. The major end-user industries for heavy engineering goods are power, infrastructure (including real estate development), steel, cement, petrochemicals, oil and gas, refineries, fertilizers, mining, railways, automobiles, textiles,etc. Light engineering goods are essentially used as inputs by the heavy engineering industry. The engineering sector in India has been riding on the back of the growth in the user industries and the several new projects being undertaken in various core industries such as railways, power, infrastructure, etc. Capacity creation in sectors such as infrastructure, oil and gas, power, mining, automobiles, auto components, steel, refinery, consumer durables, etc., has also been driving the growth of the engineering industry.

Given the diverse nature of the products and processes, the sector is spread across all the four use-based industrial groups viz; capital and intermediate goods, basic and consumer goods; with a larger presence in the first two groups of industries, with a weight of 9.3 and 26.5 in total manufacturing production (Government of India (GoI), 2009). Estimates for 2004-05 from the Annual Survey of Industries (ASI) suggest that machinery and equipments (other than electric and transport industry) covered under NIC code 29, accounted for nearly 6.9 percent of the total number of factories; about 5.1 percent of the net value added and 5.2 percent of the workers in the factory sector. This, however, leaves out a large segment of the informal economy, which operates at the tail end of the production chain, and consists of tiny and micro enterprises, sub-contractors, job workers, etc.

The informal sector also has a substantial share in India’s manufacturing exports. In 2008-09, the sector accounted for 26 percent of the manufacturing exports; of which machine tools, machinery and instruments accounted for 6.5 percent, transport equipment accounted for 6.6 percent and the manufacture of metal (primary and semi-finished iron and steel) accounted for about nine percent of exports (CMIE, 2009).

Scalar Structure

The engineering sector is relatively less fragmented at the top, as the competencies required are high, while it is highly fragmented at the lower end (for example in the production of unbranded transformers for the retail segment) and is dominated by a number of smaller players. Most of the larger units are engaged in the production of heavy engineering goods and produce mainly high-value products, using high-end technology. The requirement of high level of capital investment is a major entry barrier.

The light engineering goods segment, on the other hand, uses medium to lowend technology. The entry barrier is low, on account of the comparatively low requirement of capital and technology. This segment is characterized by the dominance of small and unorganized players, who manufacture low-value added products. However, there are few medium and large scale firms that manufacture high-value added products. The capacities in these units are small and there is a high level of competition among the players. It is these small/tiny producers as well as the workers are those who are likely to get hit first and the most, when fluctuating and recessionary trends prevail in the market.

According to available estimates, there are about 840,000 workers in the machinery and equipment industry. About 95 percent of the units and 58 percent of the workers were in the unorganized (non-factory) sector. Besides these, there may be large number of home based workers who take up job work for enterprises across the scalar ladder.

Migrant Workers and Seasonality

A substantially large proportion of the workers in Gujarat, who are engaged particularly in foundries and forging-casting come from states like Uttar Pradesh (UP), Orissa and Bihar. Some of the processes involve hard manual labour, under harsh conditions, as they require working on foundries and machines, with high tension electric power during the summer months. Local workers are often reluctant to undertake such tasks. Workers from other states tend to visit their home towns during the festival and harvest seasons, thereby creating seasonal fluctuations in labour supply. Besides this, the sector has backward linkages with agriculture and forward linkages with consumer products (like automobiles) and with the construction industry. This often makes it vulnerable to cyclical fluctuations with three good years, followed by one bad year, in terms of turnover and employment.

The recent recession has pushed many migrant workers to extend their stay in their places of original residence, especially after the Holi festival (around March 2009). Apparently many of them were also operating as job workers or sub-contractors to medium and large units.

High Material Cost

Given the fairly high component of raw material and inputs costs, especially of pig iron, coal and oil, the sector is particularly vulnerable to fluctuating prices in the international market, especially in the wake of the liberalization of imports during the last year. The sudden rise in the prices of oil and coal during the early part of 2008 had already jeopardized production and liquidity in the sector, and it has slowed down further, due to the seasonal slump in the supply of migrant workers on the one hand and the credit squeeze, on the other. The average price of crude oil (Indian basket) was US$105.77 per barrel, during April 2008, which increased to US$132.47, in the next three months. The raw material cost thus increased by about 38 percent to 44 percent, during the first two quarters of 2008-09 (GoI, 2009). Since these inputs constitute a major part of the raw materials for a large number of industries, price increases in these sectors led to a cascading effect on the cost of production. For instance, raw material costs account for about 50 to 60 percent of the total cost in foundries - a segment with widespread linkages within the engineering sector. This in turn has led to a sharp decline in the profits of the manufacturing sector, making it difficult for it to revive.

Growth Performance: The Double Squeeze

The performance of the engineering sector, in the wake of the recent recessionary period, has been fairly varied, across the various sub sectors or industries. According to the latest estimates, intermediate goods industries were the worst hit, during the last quarter of 2008-09, whereas the capital goods industries, especially machinery and equipment, were one of two industry groups, that registered high growth (the other group was tobacco and beverages).

Machinery and equipment industry accounted for as much as 62 percent of the production of the manufacturing sector, in 2007-08 and in 2008-09. The contribution of metal products was about 18 percent and that of transport equipment was about five percent (GoI, 2009). The performance of engineering exports has also shown a very diverse pattern across the various sub sectors.

The sector already faced significant volatility, mainly because of the sudden rise and then the subsequent fall in input prices. Subsequently, the sector faced another shock due to the global financial crisis and the resulting decline in exports and foreign investment. The associated devaluation of the rupee against the strengthening US dollar only made things more difficult. Unfortunately, official data reflecting the post April 2009 period and its impact on industrial production is not available. What is however recognized is the ‘double squeeze’, witnessed by several industries, including the machinery-equipments and component industry. The ‘double squeeze’ refers to the decline in the export demand and the subsequent decline in domestic demand (GoI, 2009).

The recent recessionary trends, when super-imposed on the already complex structure of production organization and the seasonality in labour supply, led to a compounded adverse impact on thousands of workers, especially those at the tail end of the production chain, in the diversified and multi-product sector. The adverse impact has been felt selectively and unevenly across different processes and sub- sectors within the engineering sector.

Given the vital role played by the engineering industry in the economy, the sector deserves special attention, when assessing the impact of the economic slow-down.

This analysis tries to capture the impact on workers and enterprises, focusing mainly on machinery-equipment and the components industry, in two major engineering clusters in the country - Rajkot and Coimbatore. The analysis presents a brief profile of the sector, both at the national level and at the cluster level.

Objectives and Methodology

The immediate focus of the study is to empirically examine the impact of the recent recession, especially on workers and micro enterprises in the informal sector and to address some of the larger issues pertaining to the impact. These are:

1) Has the recession affected different product lines in different ways? Does scale and informality matter?

2) Are the workers more vulnerable than the enterprises?

3) What are the different mechanisms that these segments use to cope? What are the implications for labour markets?

4) What are the implications for enterprises, workers and households? Can the end of the recession/crisis take care of the structural dysfunctionality affecting the tail enders in the production chain?

While this study, given its limited scope and the limited time, may not be able to provide definite answers to these questions, nevertheless, an attempt has been made to reflect on these issues, both in the empirical enquiry and in the discussion that follows.

Methodology

The study is based on a quick assessment of the impact of the economic slow-down experienced by the enterprises and its consequences for the workers, particularly in the informal segment, within the engineering industry in Rajkot and Coimbatore.

In Rajkot, the analysis draws mainly on primary data collected from 120 workers and 30 micro enterprises, operating in Rajkot city. The sample of workers has been drawn from three categories: (i) those living in colonies/residential areas, in proximity of the major conglomeration of units in the sector; (ii) those living on the outskirts of the city; and (iii) teams of labour especially from other states, (these constitute a substantial part of the labour force in the engineering industry in Rajkot and elsewhere in the country). Identification of the micro enterprises was based on the information provided by informed persons in the industry and by workers. Detailed discussions were held with several informed persons in the industry, which helped in getting a larger perspective of the industry and the impact felt by different segments in the industry, across varying size and product lines.

In Coimbatore, the research covered 123 workers and 40 enterprises, in the engineering industry, located in the city. Selecting the sample of workers however, was somewhat difficult, as those who had already left the sector/city due to the impact of the crisis were least likely to be represented, especially in the absence of information about their new places of work. One possibility was to trace such workers by visiting the workers’ colonies or areas where the workers generally live. There were two problems in following this route. First, it was difficult to access prior information about the sectoral affiliation of the workers, who may have been affected due to the crisis, especially when the focus was to capture those who worked in the sub sectors of the engineering industry. The second difficulty arose from the fact that unlike cities like Rajkot, Ahmedabad and Surat, the settlement pattern of workers in Coimbatore is fairly scattered and dispersed; identifying workers in the specific segment would require far more time than what was available for the present study. As a result, a large majority of the workers covered under the survey were contacted on the work site, and about two thirds of them did not report any direct impact of the recession.

Another difficulty faced during the survey was the fact that the sector has been facing a slow-down, for more than a year, and the major reason for decline in production has been erratic power supply as against the recession, per se. It was therefore difficult to discern the impact of the economic crisis during the study period viz; October 2008 to March 2009. While, the situation relating to poor power supply has not been looked at in this study, the overall scenario appears to be fairly grim, as nearly 50,000 workers have lost their jobs in the sector.