SMEs Hit Hard

COVID-19 pandemic has hit hard nations all around the world and most of the countries didn't see it coming and added to that unpreparedness has amplified the damages further. According to World Trade Organization (WTO), the slump in MSME sector is going to be around 32 percent. This damage could have been lessened if governments across the globe had taken timely measures to curb this by simply following the mantra of 'Lockdowns' and 'Safe Social Distancing', damages could have been ameliorated to a greater extent.

Least to say that economy is at rock bottom and many sectors have seen a tremendous decline in their growth. Whether it is heavy industries, cottage industries, but the MSME sector has been worst affected. MSME sector is the backbone of any economy, and any disruption in this sector causes major turbulence in economy in terms of income generation and jobs.

They contribute major part of economy world-wide and are very important in creating jobs across nation. As per data issued by World Bank they represent about 90% of business and more than 50% of economic activity world-wide. SME contributes 40% of GDP in emerging economies.

As per World Bank estimates above, we can see that MSME sector plays a major role in Asia Pacific region and Sub-Sahara Africa, where most of the population of world resides.

Pre-Crisis MSMEs Indian Scenario

Seeing the prospects of growth of MSME in the Union budget of 20-21, Rs 7572.20 Crore has been allocated which has been an all-time high so far. Even the government has asked RBI to restructure the debt window for MSME sector to clear any ambiguity. For development of MSME cluster for increasing the capacities of MSMEs, productivity and competitiveness, MSME sector has been allocated funds of Rs 391 Crore as compared to Rs. 228 Crore which is an increment of 71%. However, as shown in table below the credit gap stands at an exorbitant level at Rs.25.8 trillion.  

MSME Global Trends

Globally it is not so a thriving phase for MSMEs before COVID-19 crisis, however, the sector remained like a sweet spot for economies and creating much needed jobs.

If we talk about China, before COVID-19 impact, the push by government to reduce pollution and clean environment has hit hard their MSMEs. This culling of MSMEs has forced 176,000 businesses to shut down impacting jobs and growth. China's GDP was predicted to fall from 6.4% to 6.1% at the beginning of 2019.

MSME sector forms the back bone of American and European economies. The US alone has 30 million of MSMEs which accounts for two-thirds of the jobs created. MSMEs' exports have shown tremendous growth with significant boost in economy by paying higher wages and rewarding greater profits.

In Euro zone during the previous financial year of 2018-2019, MSMEs contributed about 60% for the majority of the growth achievements in their economies. Micro SME's generated 28.5% of this growth while small size contributes 17% and medium size contributes 14% respectively. Many suitable policies were adopted by EU to stimulate the growth of SME's in this region.

Impact on Indian MSMEs

As per the analysts, we can see in the chart below loan amount of MSME sector outstanding with banks is of Rs. 4.73 lakh crore which is second highest and the debt outstanding in general along with large enterprises is one of the major reasons for the slower economic growth faced by India. The bad loans by NBFC can be attributed to NPA on account of MSME failure in repaying the debt. This to an extent increased the risk in banking sector, and the pandemic resulted in further deterioration in bad debt across banking sector.

In spite of the fact that MSME contributes nearly 30% of country's GDP and around half of the country's exports and there are 6.33 Crore unincorporated companies employing around 11 crore people. Due to slump and hence reduced cash flows of MSME the sector is not able to repay its creditors. Yet, according to TransUnion CIBL-SIDBI MSME Pulse Report NPAs in MSMEs continue to be lower than those of the large corporates.

Impact on MSMEs Globally

The vital parameters like global trade, investment, growth and employment are going to suffer a lot and the way to reach sustainable goals seems far way behind. One of the major industries affected was textile industry where the growth is predicted to be contracted to 27-30% as per a report by McKinsey. In France a drop of 90% has been registered in apparel consumption, while online sales have been declined to 20% across Europe and 40% across United States.

The growth in pharmaceutical industry has brought some good news during this global crisis and it is not like something out of the blue but due to pandemic. Seventeen emerging economies from regions like South America, South-East Asia and Eastern Europe are becoming increasingly attractive markets for pharmaceutical industries.

An analysis of report by CSO of India, the current and potential impact of COVID-19 on MSME sector on different parameters is explained below.

Public Policy Measures & MSMEs

Undoubtedly the impact of Covid-19 on Indian economy could be significant and with global pandemic-triggered recession looming over Indian economy. Following steps are taken by government to reduce the impact on SMEs.

• RBI has introduced moratorium on loans availed by MSME for a period of three months, deferred interest payment without asset classification and ease on working capital so that MSME can revive their business.
• Many Public Sector banks have introduced emergency credit line where a 200 Crore of loan or 10% of existing fund based working capital can be availed by the MSME borrowers, provided within 48 hours with minimum paper work and zero collateral.
• The GST payment has been deferred till June 30 for the suffering MSME sector so that they can withstand the demand dip.
• RBI has introduced a loan of Rs 50,000 Crore on long-term repo rate operation aimed towards NBFC and micro finance institutions.
• The planned debt purchase represents about 2 per cent of the total outstanding debt of the top 20 NBFCs that represent close to 75 per cent of the assets of the NBFC sector.
• The government will set up a special purpose vehicle that will subscribe to new and existing bonds issued by NBFCs up to a maximum of Rs 30,000 crore and have decided to provide uncollateralized loan of 3 lakh crore four year tenure credit guarantee.
• Companies with outstanding of Rs25 crore and turnover of 100 crore will qualify for same, in 45 days government will clear the receivables.
• EPF contribution reduced from 12 to 10% for both employer and employee having workforce of more than 100 people.
• Global tenders have been disallowed for projects up to Rs 200 crore.
• MSMEs declared NPAs or those stressed will be eligible for equity support as the government will facilitate the provision of Rs 20,000 crore as subordinate debt.

Government Measures Globally: A Comparative Picture

Although government has taken many steps that are in compliance with the ongoing COVID-19 scenario and its impact on MSME sector, but a lot should have been done. Major thing that the governments failed to address is that issue of daily wage earners, who were dependent on the MSME.

In Brazil, government has decided to pay part of their salaries for micro and small units. In countries like New Zealand and Canada temporary wage subsidies of three months has been provided, such type of social security support systems initiatives has been lacking from government of India side.

Deferment of payment of essential services like electricity, water tax, land tax, rent etc. could have been deferred until the lock down is over and business starts to gain momentum so that payment of salaries become a priority and lay-offs of employees can be avoided. However, such measures have been taken proactively by Singapore. In United Arab Emirates, the cash reserve ratio has been reduced to 125 bps similar in compliance with the strategy adopted by RBI.

United States government has planned to infuse US$359bn in forgivable small businesses i.e. those units that are retaining their employees. Such kind of measure was missing by RBI although the central bank has made many provisions for MSME.

In European Union, provisions have been made such that the bigger companies do not hold the payment for sub-contractors and other small manufacturers.

Way Forward

So what is the way forward to move out of this Pandemic of COVID-19 for MSME globally and especially for Indian MSMEs, then there needs to be an exit plan as the economies cannot be stalled further. The recent changes in the consumer pattern and behavior will cause disruption in the new kind of businesses and MSME sector will not be looked upon as they were previously operated and familiar.

Consumers turned to E-commerce platform and aggregators to meet their need for essential supplies and needs, and contact less deliveries will remain a new way of doing business. Uber has opted to deliver essential supplies and Zomato has also opted to deliver groceries.

The market place model of e-commerce platform acts as a meeting point of buyer and sellers and no inventories need to be replenished continuously and another model is of one seller model where there will be a single seller and invoices are made in the name of brand. The way we experience different and very innovative business eco-systems bound to have a significant bearing on MSMEs prospects. It's only the very proactive and well thought out public policy support and conducive climate created by industry associations such as CII, FICCI and ASSOCHAM can assure a smooth sail for these small and medium scale enterprises in these challenging times

 

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Dr Gajavelli V S is a Professor and Chairperson-Center of Excellence for Sustainability, Growth& Development at Institute of Management Technology Nagpur, India.  He has more than 28 years of experience in research, management education, conceptualization and administration of executive education programs, in-company training programs, faculty development programs and consulting.

Dr Gajavelli has presented and published several research papers in various national and international professional forums such as United Nations Environment Program (UNEP), Nairobi-Kenya and International Society for Ecological Economics (ISEE), Canada and authored books in the area of Economic Environment and Decision-making. He has several recognitions and professional awards to his credit, and can be reached at [email protected]

Sourav Sanyal, earlier worked in sales and marketing across manufacturing sectors of different products, for ex- foundry sectors both ferrous and non-ferrous foundries, ceramic industries, and also provided client optimum solution to revamp and optimize their operations and gain more productivity, by providing product solution and service expertise. He is currently pursuing a management program in Marketing and Business Analytics at a reputed Institute of Management Technology Nagpur, Maharashtra.