Impact of COVID-19 on Micro, small and medium enterprises (MSMEs)

COVID-19 is the black swan of 2020. It has ravaged economies across the world.

The pandemic is expected to hit India’s Micro, small and medium enterprises (MSME) sector particularly hard because of a lack of adequate cash reserves to tide over the crisis.

The chairman of the Global Alliance for Mass Entrepreneurship (GAME) has said that over 25 % of India’s 69 million micro, small and medium enterprises (MSMEs) may have to shut down if the lockdown extends beyond four to eight weeks.

MSME sector is the backbone of the Indian economy. It contributes to 31 % of India’s GDP, 45 % of exports and employs over 11 crores people.

Note: MSMEs are defined in terms of investment in plant and machinery. Look at the chart below:

Around 99.5% of MSMEs in India are micro firms (with an investment in plant and machinery less than ₹25 lakh), and only 6 % are registered with the government. [Overwhelming majority of the MSME sector is not organized]

Micro-enterprises (99.5 % of MSMEs) are usually run by a single person. The medium and small enterprises (0.5 % of MSMEs) provide employment to the remaining 5 crores employees.

If MSMEs close down operations, it will affect the livelihoods of those running the enterprises and their employees. The hospitality industry, which employs 4 crore people, could see 1.2 crores of those jobs disappear at the end of this crisis; while the retail industry, which employs 4.6 crore people, may face up to 1.1 crore job loss.

Additionally, it will disrupt the entire supply chain as these enterprises are the major suppliers of intermediate goods to large businesses. They also supply goods to final consumers. It is critical that this sector is protected so as to prevent this crisis from spreading into the rest of the economy.

This sector has already been struggling due to low domestic demand and liquidity crunch in the last few quarters. The liquidity issues faced by MSMEs are usually due to due to delays in payments by customers or in GST refunds as well as lack of access to institutional credit. According to a 2018 report by the World Bank, only one-third of the MSME credit needs is provided by the formal banking system.

[You may read: What is GST?]

COVID-19 and the subsequent lockdown has come as a final nail in the coffin and worsened the liquidity crunch, as the MSMEs do not have enough cash reserves to withstand the crisis.

After the necessary lockdown imposed by the Government, the economy has come to a grinding halt. Small businesses have been struggling to even provide ‘essentials’ due to supply chain disruptions. There have been difficulties in procuring raw materials, packaging, etc. There is a non-availability of laborers also due to large-scale migration.

Even then, they have to pay their employees and pay other fixed costs like interest, rent, electricity, etc

The Government and the RBI have come up with short-term measures to help the MSMEs stay afloat and survive through the crisis:

1. Extended income-tax related compliance deadlines to June 30, 2020.
2. Delayed goods and services tax (GST) returns for the months of February to April and until June, without drawing interest
3. Raised the threshold for starting insolvency proceedings from Rs.1lakh to Rs. 1 crore.
4. The Government will bear the Employees’ Provident Fund (EPF) contributions on behalf of employees and employers for the next 3 months. This scheme will be applicable to organisations up to 100 employees, where 90 % draw less than Rs.15000 salary.
5. 3-months moratorium on all term loans outstanding as of March 1, 2020
6. Deferment of interest rate on Working capital loans for 3 months. (Read: RBI cuts rates to mitigate COVID-19 impact)

Despite the announcement of these measures, a survey of 5,000 MSMEs by the All India Manufacturers Organisation (AIMO) revealed that 71% of the enterprises could not pay salaries to their workers for March 2020 due to the lockdown.

The RBI’s efforts to infuse liquidity didn’t have the required impact as most of the MSMEs’ funding comes from informal sources. The measures taken by the RBI reach only 1/3rd of the MSMEs which can access credit from the formal banking system. Also, most MSMEs are not registered. In the absence of an adequate database, it becomes difficult for the Government to target the enterprises actually in need of Government support.

And a major obstacle to restarting operations in the third phase of the lockdown is the unavailability of labour due to an exodus of migrants from cities to villages.

[You may read: Mass Exodus of Migrant Workers due to COVID-19]

That said, the Government should come up with a fiscal package targetted towards MSMEs. It should ensure the availability of cheaper bank loans. It can consider an extension of loan moratoriums, GST cuts, faster GST refunds, loan guarantees, etc and also provide overall stimulus to increase the money supply to boost the demand of MSME goods in the economy.

[You may read: Impact of COVID-19 on Pharmaceutical Sector]