MSMEs across sectors have been hard hit by the COVID-19 pandemic and the lockdown measures have put many MSMEs on the brink of survival.
By Dr René Van Berkel
June 27 is World MSME Day. The day was established in 2017 by the United Nations to put Micro, Small and Medium Enterprises in the spotlight for their contribution to inclusive and sustainable development both locally and globally.
This year’s global theme is "MSMEs: First responders to societal needs". The pandemic and lock down restrictions uprooted the entire economy and laid to bare pre-existing structural weaknesses particularly in MSME segment. As a result, many MSMEs across all sectors find themselves on the brink of survival in the current COVID-19 times. MSMEs have been singled out as priority in the Government’s Atmanirbhar Bharat recovery package of regulatory reform and credit support.
In India, 6.3 crore MSMEs provide employment to over 12 crore people, contribute to 45 percent of exports and over 30 percent of manufacturing value added. MSMEs are an important part of larger national and global value chains and their health has a bearing on supply chains overall and indeed the ability to supply numerous consumer and capital goods and services.
MSMEs have been heavily affected by the COVID-19 crisis. The survey of over 46,000 MSMEs published earlier this month by All India Manufacturers Organisation found that 1 out of 3 MSME considers its enterprise beyond recovery whereas a further 32 percent expect recovery to take at least six months. This will impact the lives and livelihoods of crores of workers and their families. The prospects are indeed dire, yet how dire only the future can tell. The pandemic and crisis are still with us, regardless of whether we consider ourselves as 'locked down' or 'unlocked'. When and how government, business and society at large do succeed to limit the scale of the pandemic and its health and human impacts now and in coming months will have a lasting impact for several years to come.
In the lead up to the lock down in India, manufacturing already started to slow down, particularly in sectors dependent on imports of critical parts, components or ingredients and those dependent on exports of intermediate or finished goods to affected regions. Moreover, consumption dwindled, particularly in hospitality, travel, tourism and associated sectors due to customers’ concerns over the spread of disease and inability to meet and travel. The lockdown uprooted the business scenario overnight and disrupted both the availability of suitably qualified workforce as well as supply chains.
With the exception of critical sectors, sales dropped to close to zero for most businesses. In the absence of sales income and with costs for labor, rent, loans, etc. continuing, businesses very quickly ate away their working capital during the lock down period. MSMEs require immediate cash to pay for essential inputs as raw materials, energy and labor to restart business. However, this only makes business sense, when there is a real and immediate prospect to sell which requires re-emergence of market demand across B2C, B2B and B2G segments. Market demand is the only engine for economic recovery, cash flow is the starter and emergency credit can be the ignition spark.
The Finance Minister's Atmanirbhar Bharat package bets on credit support to restart MSMEs at large, particularly through collateral free automatic loans for emergency credit (up to 20% of outstanding loans with maximum of 5 crores) and equity infusion through a Fund of Funds.
According to early reports, the emergency credit is already being availed by MSMEs. By design though the emergency credit support can only serve those MSMEs that have a good credit history and established banking relations and have orders in hand or other security for demand for their products or services. Many MSMEs cannot access emergency credit as their pre-lockdown financial position was already weak or in survival mode and obtained largely from (semi) informal and non-banking sources. MSMEs are also simply concerned about their ability to repay in years to come due to uncertain market prospects. And will buyers indeed pay on time – consumers, businesses, and governments all included.
The operation of MSME segment has for long time been constrained by outdated MSME definitions based on invested capital that indeed disincentivized MSMEs to grow or update their technology to keep pace with market demands. The swift action under Atmanirbhar Bharat to revise MSME definitions with effect of 1st July 2020 is applauded. The new definition abandons the difference between manufacturing and service MSMEs, and classifies enterprises on the basis of combination of invested capital and annual turn-over. This will help the MSMEs to grow by lifting the low capital thresholds that dampened the urge and ability to expand The exact fall out of the change is not yet clear - some enterprises may move up in the classification and others will move down – particularly more capital heavy small industries currently considered large, may change to medium category and re-avail some MSME benefits.
With the improving external business environment, MSMEs can also look internally to firm up their business prospects. This is the trust behind Building Back MSME Business from Crisis (B3C) – an online knowledge portal for MSMEs that provides practical guidance and tips to restart, recover and revitalize business post lock down with COVID-19 (www.b3cmsme.org). Launched by the United Nations Industrial Development Organization (UNIDO), B3C presents a roadmap for MSMEs and suggests business areas that might be structurally improved as part of the recovery effort – finances, operations, workforce, supply chain, customers, entrepreneurship and health and safety. For finances, B3C contains practical suggestions to consider to increase or speed up business income, to decrease or slow down business expenses, to adjust and possibly minimise working capital requirements and to revisit business model to enable business growth.
MSMEs across sectors have been hard hit by the COVID-19 pandemic and the lockdown measures have put many MSMEs on the brink of survival. MSMEs are part of the economic and social fabric of the country. Hence, without a vibrant MSME sector,recovery will not be complete and leave many Indian workers and entrepreneurs behind.
On the occasion of MSME Day, the international community appeals to governments, buyers, consumers and other stakeholders to rally behind MSMEs and help them tide over the COVID-19 crisis.(The author is Representative of the United Nations Industrial Development Organization, Regional Office in India)