COVID-19 Impact On MSMEs & Its Significance On Economic Revival

The coronavirus crisis has spelt crisis across the world as several countries now focussing on curbing the rapid spread of the virus while dealing with the economic ramifications. With governments around the world imposing lockdown and social distancing becoming the new norm, the post-pandemic world will wake up to a new trading culture. On the home grounds, the COVID-19 pandemic has battered all sectors of the economy, with the micro, small and medium enterprises (MSMEs) among the worst-hit. 

Considered as the growth engine of the nation, the MSME sector accounts for 33.4% of India’s manufacturing output, employing about 120 million and generating 45% of India’s export. However, the pandemic outbreak and the consequent stoppage of economic activities have triggered panic across the nation, with businesses facing extinction risks. Although some business activities within the ‘non-essential category’ were resumed as the lockdown extended, economic activity, except for agriculture and essential activities, remains halted. 

The MSME sector, the majority of which relies on day-to-day business to stay afloat, continues to be the most vulnerable owing to the lockdown and a decrease in demand. According to a survey covering 5000 MSMEs, conducted by the All India Manufacturers’ Organisation (AIMO) has revealed that 71% of the businesses weren’t able to pay salaries in March. The survey further revealed that a whopping 43% would shut shop if panic extends beyond eight weeks. Considering the stoppage of economic activity over the past few weeks, it is unfathomable that a vast number of MSMEs will be choked, perhaps to the point of permanent closure. 

How Can The MSME Sector Survive COVID-19? 

The MSME sector that forms the backbone of the Indian economy was hit due to the blows of demonetisation and GST implementation. However, as the situation began to show signs of improvement, the pandemic outbreak ushered in a new set of challenges, leaving many companies in the lurch due to the pandemic outbreak and the consequent lockdown. Additionally, factors like credit deficit, shortage of working capital, and a decrease in demand for non-essential goods paints a grim picture. 

Despite the fact that the government is taking countermeasures to combat the loss incurred due to the pandemic, MSMEs are struggling for stability as sales and revenue remain at a halt. As per the CII CEOs snap poll on the impact of COVID-19 on the economy and industry, 54% of company heads predict job losses in their respective sectors post the lockdown whereas 45% foresee 15-30% layoffs. Additionally, 33% of the firms are expecting a fall in revenue for FY21. For instance, auto manufacturers like Maruti Suzuki said the production for April was ‘zero,’ whereas, during February, the company produced 1,40,933 cars. This is the plight across the manufacturing industries, including textiles, chemicals, among others.

What makes the situation worse is that with a decrease in demand, and no possible rebound in the future, it may get increasingly challenging for most of the businesses to adhere to their obligations. According to TransUnion Cibil, MSME loans worth Rs 2.3 lakh crore are at a higher risk of becoming non-performing. Further, the need for working capital will increase as payment cycles are likely to be extended, generating cashflow issues. This situation is expected to prevail, even as the government relaxes restrictions. 

Countermeasures Taken By The Government To Tide Over The Pandemic 

To inject lifeblood to the MSME sector, the government needs to soon arrive at a fiscal stimulus. The Reserve Bank of India declared several monetary policy measures to curb the impact of the coronavirus pandemic: 

• Declared a considerable cut in the policy repo rate by 75 basis points to 4.4% – lowest policy rate in this century
• Announced to inject around ₹3.74 lakh crore liquidity into the system
• Allowed a 3-month moratorium on payment of instalments on the existing term loans

RBI has also opened another Rs 50,000 crore in refinancing window for Nabard, Sidbi and NHB under which: 

• Banks will require to make these investments within one month from receiving the funds from the RBI 
• Reduced the liquidity coverage ratio to 80% from 100% previously, and provided a special financial facility of Rs 50,000 crore to All India Financial Institutions (AIFIs) at the repo rate

Although these announcements are expected to assist the MSMEs in tackling economic stress, they may not prove to be remunerative immediately as the demand is likely to remain low due to the prevailing lockdown restrictions and low business emotions. 

Other measures to help the MSME sector comprises emergency credit lines announced by Public Sector Banks, a low-interest loan rate of 5% within 48 hours declared by SIDBI, and business continuity measures by the RBI.

The Minister for MSME and Road Transport and Highways, Nitin Gadkari said that the government is working on an agro MSME policy that will focus on entrepreneurship development in rural, tribal, agricultural, and forest areas for manufacturing products using local raw material. While the measures are taken a focus on easing the short-term liquidity concerns, the stimulus package, soon to be announced by the government, needs to be far-reaching for the MSME sector to tide over the impacts of the pandemic. 

The government needs to arrive at a decisive plan to revive the MSME sector. However, it may not be an easy task as it will take time for the situation to get anywhere near normalcy. Working capital will continue to be the mainframe of the sector, and any shortage at it will challenge its survival. Having said that, the allocation of a contingency fund for the MSME sector is the need of the hour, whereas, businesses need to rework on their budgetary requirements and restructure accordingly to keep functioning. 

The post-pandemic world will experience a dearth of capital and will require financial institutions to lend a helping hand to the MSME sector. The government will need to enable a comprehensive ecosystem for the MSMEs to get back on track and start conducting business. 

Bottom Line

Considering the current situation, the need of the hour is the allocation of a robust fiscal package to revive the confidence of the MSME sector and thereby initiate economic recovery. It is also important that the financial relief not just provide temporary relief by infusing short-term liquidity, rather address medium to long term requirements. It is critical for the government to introduce a policy framework, keeping various scenarios in mind, and foster a holistic approach toward building the MSMEs resilience to the pandemic outbreak, as once the pandemic fades out, the nation will require its growth engine to start building the economy.