India’s quarterly growth rate has been receding sequentially since Q4 FY18 and India recorded a growth of 4.2% in FY20, the lowest in 11 years. MSMEs in India contribute to 29% to GDP, almost half of India’s exports and employing 110 million people.
The lack of impetus for structural initiatives have caused disruptions and low productivity for MSMEs. From an average of around 13% growth, clocked during FY12-FY14, bank credit to MSMEs dropped steeply to 1% during FY20.
To understand how the recovery of the economy is taking shape, Dun & Bradstreet has looked at the extent of impact on 14 sectors, out of which the impact on the MSME sector has been severe.
Covid-19 Impact – Severe
The report analysed how the pandemic has severely curtailed consumption and production activities and the MSMEs, which constitute more than 99% of businesses, have been significantly affected. MSMEs have largely borne the brunt of the disruption in the supply chain, scarcity of raw materials, unavailability of migrant labours and restrictions in transportation till at least May 2020. Export orders were held up. Disruptions in cash flows, lack of adequate working capital and delayed payment from their vendors had worsened their situation.
Moreover, the report stated, MSMEs have been relatively less resilient than large firms to withstand the crisis in terms of cash reserves, access to technology and ability to adapt to the new normal.
Besides this, the debt burden of MSMEs also increased due to pre Covid-19 economic slowdown together with demonetisation and GST. Cash strapped MSMEs were thus considerably affected by the pandemic. A global survey across seven countries including India conducted towards late March 2020 revealed that self-employed businesses in India had six weeks of cash reserves, if their revenues were to fall by half or more due to the pandemic.
What compounded their woes further were the delayed payments to the sector by the government and the private sector. This added to their struggle of staying afloat amidst severe demand crunch. The delayed payment to MSMEs monitoring system of the Government shows that (as of October 22, 2020), more than 38,000 cases filed by MSMEs to collect outstanding dues from governments, public sector units and the private sector are pending (application and cases) which amounts to more than Rs 128 billion.
Recovery of the sector – Long Term
The report stated that an expected steep decline in overall growth would be largely owing to the deterioration in business operations of medium and small-scale industries. Further, the ability of large companies to avail the various policy benefits are usually greater than MSMEs. MSMEs on the other hand often lack awareness. The recovery across different scales of business would thus be uneven.
Sectors like online gaming, telecommunications and e-education operating in the digital space are witnessing a positive impact by leveraging opportunities arising from the pandemic. On the other hand, traditional sectors like food, drugs, pharmaceutical, ITeS (IT-enabled services), banking, retail, automotive, real estate and jewellery are witnessing moderate to high to severe impact. The recovery of these sectors will take six months to more than a year. Sectors like logistics and warehousing, metals, media and entertainment will also take up to one year to recover and return to February 2020 levels.
What will help is also the government’s thrust towards localisation that would provide MSMEs opportunities to manufacture substitutes for imports, especially from China. In May, the government announced that it would disallow global companies from applying for government procurement tenders amounting for up to Rs 2 billion to support local micro, small and medium-sized businesses.
As part of stimulus measures, liquidity support worth Rs 3.7 tn are to be provided to MSMEs largely in the form of complete/partial guarantees on loans and equity infusion out of which Rs 3 tn collateral-free loans would be given to MSMEs units having existing loans. As barely 5% of India’s MSMEs have access to institutional credit, a large section of the MSMEs would be left out of this benefit. The access to credit is expected to become even more challenging given that the risk appetite of creditors will likely decline during the pandemic as businesses stand impaired and order book is yet to revive.
The report noted that the government’s initiative to revise the definition of MSMEs’ would help a larger section of firms to avail the benefits from the government schemes. However, revising the turnover limit for medium enterprises upward to Rs 2.5 billion from Rs 1 billion means that a greater number of companies will be eligible for the benefits that the government has enlisted for the MSME sector. This also calls for a detailed monitoring of the delivery system so that smaller and micro enterprises do not get crowded out in this process.
The challenges outlined by the report findings included a lack of technical expertise and the perceived costs of developing a web presence posed a deterrent to MSMEs. The challenges are greater for the micro segment which are not registered. The micro-segment which remain below the threshold limit of GST are not registered and it becomes difficult for the government to identify and address them adequately. Moreover, the global recession will also limit the revival of export demand for MSMEs.
The report summarised that the MSME units engaged as vendors with the government or public sector units are likely to revive first followed by the other segments. The overall recovery time of an MSME will be tied to the sector in which it is operational, it stated.