Drowning in Losses

The devastating floods in Tamil Nadu in early December, especially in and around Chennai, have dragged down Indian manufacturing. Though manufacturing has been sluggish in recent years, the Nikkei India Manufacturing Purchasing Managers Index (PMI), a measure of manufacturing output released every month, had been rising, however slowly, continuously for the past 25 months. In December, however, it dipped, and that too to a 28-month low, from 50.3 in November to 49.1 - its sharpest fall since the early months of the downturn of 2008/09. Why? "Indias manufacturing sector took a turn for the worse at the year end, with already gloomy internal demand further hampered by floods in the South of the country," Pollyanna De Lima, author of the PMI report and economist with global financial services firm Markit, wrote.

How much is the damage? Estimates vary. N.K. Ranganath, CEO and Managing Director of leading pump manufacturer Grundfos and former president of the CII's Tamil Nadu chapter, maintains it could be anything between Rs 20,000 and Rs 50,000 crore. "It was an unprecedented calamity," he says. "The scale of damage inflicted on industry is only now coming to light and being tabulated." The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in its preliminary estimate pegged the losses at more than may Rs 15,000 crore, while Aon Benfield, UK-based reinsurance broker, has put them at $3 billion (Rs 20,000 crore). A senior government official claims it is too early to say. "It will take many more weeks to arrive at a comprehensive number for the scale of loss suffered by industry," he says. "But it is apparent that the damage has been higher than initially estimated."

One of the worst affected is the automotive industry on Chennai's outskirts, where factories of top companies such as Hyundai, Ford, BMW, Renault-Nissan, Daimler, Royal Enfield and Apollo Tyres are located. Indeed, every third car in the country is manufactured in this area. All of them had to shut down for three days to a week. Some, led by Hyundai, have sought to make up by working extra shifts since then, including on Sundays. Again, Tamil Nadu accounts for close to 20 per cent of the turnover of the country's auto components industry, employing over 600,000 people. "In the wake of this unforeseen calamity, there is an urgent need to announce a relief and rehabilitation package for the industry and its employees, especially for the SME segment," says Arvind Balaji, President, Automotive Component Manufacturers Association.

More than the automobile makers, it is this segment that is affected, because many units neither have the deep pockets nor in many cases the expertise, to quickly set things right. Some of them are not even properly insured. "After so much destruction, the General Insurance Corporation (GIC) has reported insurance claims of merely $300 million," says a senior functionary of the Federation of Indian Commerce and Industry (FICCI), who does not want to be named.

Indeed, the state is home to the highest number of small and medium enterprises (SMEs) in the country (which includes the auto ancillary makers). "There is an urgent need to announce a relief and rehabilitation package for the Tamil Nadu industry, especially for the SME segment," says Balaji. Even big players like Grundfos India have been unable to meet some of their export deadlines, because some of the components are sourced from vendors and suppliers in the SME sector. "The Centre and the state should work together to provide help to these small companies by giving tax breaks, asking banks to extend loans and so forth," says Ashok R. Thakkar, Convenor of FICCI's infrastructure panel.

Most IT majors have large units in Chennai and these too have also suffered. Already, a number of them have announced that their 2015/16 third quarter results would be impacted because of the floods. Some have also announced setting aside a fund to aid the relief and rehabilitation. TCS has earmarked Rs 1,100 crore for affected employees, while Cognizant has committed $40 million (Rs 260 crore) for the city's rehabilitation. Some outside this sector have also responded similarly. "But the state needs to help industry," says Ranganath.

The floods may have receded but it will take many months - if not years - for the industries that have suffered to bounce back.