MSMEs striving to survive in India amidst COVID-19 crisis
Micro small and medium enterprises (MSMEs) comprise the most important sector and the backbone of the Indian economy contributing nearly 25% of the services GDP and one-third of manufacturing GDP, more than 40% of exports, over 28% of gross domestic product (GDP). If they collapse, the entire supply chain and distribution would also be affected thus impacting the big companies as well who are dependent on them.
They have been majorly hit by the lockdown which had brought all economic activities to halt and are now on the brink of survival. They are considered to be the key drivers of job creation and economic growth giving employment to over 11 crore people. Most of them are struggling to survive while some have gone out of cash in this economic distress due to COVID 19. According to Global Alliance for Mass Entrepreneurship (GAME), nearly 6 crore MSMEs need immediate help ranging from short-term liquidity to simple compliance for their as well as the revival of the Indian economy. More than one-third of these small businesses can go extinct if they do not have access to financial aid.
Even before Covid-19 happened, the majority of MSMEs in India were already struggling to cope up with demonetization, GST, and the slowing economy. Being a small and unorganized sector with low productivity, they have never been able to compete with big companies. 95% of all companies in India employ less than five people. 98% employ less than 10. Only 20,000 firms have a paid-up capital of Rs 10 crores, or more each. Hence, it can be seen that we have an extremely low industrial base.
Manufacturing has slowed down particularly in sectors dependent on import of raw materials and export of intermediate and finished goods to affected regions. Other sectors that have been hit hard by the COVID-19 pandemic are hospitality, travel, tourism, and associated sectors due to customers’ concerns over the spread of disease and the inability to meet and travel.
In May 2020 Finance Minister of India, Nirmala Sitharaman announced support measures including 20% extra working capital finance for small businesses with an outstanding debt of up to Rs 25 crore and sales of up to Rs 100 crores, provided they have not defaulted on loan repayments. This financial package worth around Rs.3.5 trillion was announced by the union government and approved through ECLGS for the MSME has been operational from June 1. Under this scheme, the loan amounts sanctioned by public sector banks increased to Rs 42,739.12 crore, of which Rs 22,197.54 crore has been disbursed at the end of June 20. Meanwhile, private sector banks sanctioned Rs 32,687.27 crore while disbursed Rs 10,697.33 crore.
The main objective of the credit guarantee scheme is to motivate banks and other lending institutions for making funds available to MSME by giving them a 100% guarantee from loss if faced any due to non-repayment by the borrowers. This scheme is the biggest fiscal component of the Rs 20-lakh crore Aatmanirbhar Bharat.
Kotak said that private banks are hesitant and a little slow in adopting this scheme compared to other public banks because being a private bank customer’s interest is their foremost priority and they need to ensure the safety and security of their depositors.
All India Manufacturing Organisation (AIMO) said that at least 78% of MSMEs are not satisfied with the financial package execution and are expecting that the government should provide an alternative financial mechanism than just loans, and provide them a wage stimulus for their workers. Based on 46,500 responses that it received on its survey, the on-ground reality it was found that many small and medium businesses have not seen direct benefits of the package despite numerous visits to banks. Hence it may not benefit 85% constituents of the sector.
The main problem here with the MSMEs is that it is minimal or zero demand in the market which means absolutely zero sales income with recurring costs like wages, rent, and other costs consuming the working capital. Hence the package won’t be of much use until and unless the package also aids in demand creation which would further help in strengthening their business otherwise it would again lead to non-repayment of loans.
According to the GAME report by an alliance of industry leaders and bureaucrats, this pandemic and lockdown can see a sharp decline in profits of MSMEs by as much as Rs 1.2 trillion. At least 73% of MSMEs have reported a drop in orders, while 50% have indicated a 15% rise in inventory levels amid demand erosion, supply chain disruption, and non-payment of dues. This could cause significant compression estimated at Rs 0.8–1.2 lakh crore in profits for companies with a turnover between Rs 75–250 crore.
What should be done to reduce the damage?
MSME should look for other sources of financing such as private equity and risk capital apart from taking loans from banks and should utilize all the available opportunities. On ground reality, people are not much aware of how to avail the benefits from these schemes, and hence they need to be communicated well and clear about it along with strong execution of package by all participating bodies including government, industries and banks, and other financial institutions. There should also be relaxation in eligibility conditions, ease of doing business, and reduce compliance burden and norms so that borrowers can repay loans in a longer timeframe without any bank guarantee. There are around 9,000 compliances in India currently have a penal action for which immediate action should be taken.
India cannot become Atmanirbhar, or become a Rs 5-trillion economy without solving the problems faced by small businesses. In a nutshell, we can say that with MSMEs would come up with new entrepreneurs with their new ventures which would increase employment opportunities in India and thus people would have more money to spend in the market and ultimately will result in demand creation. This would result in the stabilization and growth of our economy.