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State of India's MSMEs and the Covid-19 Pandemic

India is arguably one of the most exciting prospects in the global economy. With a population of 1.39 billion, the IMF has projected it to be the fastest growing economy in the world last year. However, a staggering 83% of the work force exist in the ‘unorganised’ sector, working jobs in what we know to be the ‘gig economy’. As a result, unemployment is rampant amongst workers, who work odd jobs in vastly different sectors with little to no job security, where working without a written term of employment is common.

This is where Micro, Small and Medium Enterprises (MSMEs) come into play. Sprawled across all sectors, from manufacturing to processing, from preservations of goods and services to non-agricultural activities, MSMSEs give a much-needed boost to the Indian economy by creating different kinds of jobs requiring levels of skill. While some may argue that these jobs are but a bandage to a deeper, underlying problem within the economy, the 111 million jobs and 29% contribution to the country’s GDP through sales proceeds play a critical role in the elevation of India’s economy over the past decade. Furthermore, MSMEs promote regional economic balance by bringing in investment to rural areas, encouraging a large number of people to engage in non-agricultural jobs, generating backward and forward linkages within many industries. Instead of a bandage, it can be argued that MSMEs are the backbone of the Indian Economy. This essay aims to discuss the plight of MSMEs during the pandemic, and what the Government should do to bring it back to life.


THE PLIGHT OF MSMEs DURING THE COVID-19 PANDEMIC:

With the onset of the COVID-19 pandemic, there came a nationwide lockdown to reduce the rate of viral transmission. This adversely impacted 95% of all MSMEs, effectively crippling the sector. Here, we will examine the mechanism behind this negative impact.

  1. Shift to an online mode of business:

MSMEs often do not possess the advanced technology that is available to the large industries. With most of their operations existing physically, they did not have the capacity to exist, let alone compete against businesses that were able to shift online. Due to a lack of sophisticated technology, their production and operations dropped to an all time low. Majority of them had to either reduce the scale of operation or, in more adverse cases, entirely shut down.



Indicator

2020

2021

Disruption of Business

70%

40% (End of February)

Disruption of Business Volume

46%

11%



35% of MSMEs had no chance of resuscitating their businesses after incurring heavy losses in the initial lockdown. Those who were able to shift online faced many challenges, a lack of proficiency with online tools meant inefficiency and slow processes, many also fell victim to financial fraud and cybercrime.


The availability of raw materials became scarce as imports were cut down; and with most export services being shut down due to the lockdown, production was hindered. These were amplified by declining international relations, for example: India’s worsening relationship with China resulted in the Government introducing “Atmanirbhar Bharat”, which promoted indigenous productions of raw materials to replace China has a major supplier, disrupting the supply chains for many MSMEs that existed within the production processes.


1. Lack of demand:

Unemployment was the defining trait of the lockdown. The age-old phenomenon of unemployment, disposable income and consumption decreases were prevalent throughout the global economy, and India was not exempt from this. When the spending dropped, some of the major spheres affected were manufacturing, construction, trade, hospitality, food, transport and more, which most MSMEs function in. Buffeted by both the consumption decreases and Government restrictions, many businesses were forced to cut loose hundreds of thousands of labourers and low skilled employees, creating a downward spiral of lower disposable income. While many big firms adapted to the new circumstances and somewhat retained their income, many MSMEs could not survive.


2. Diseconomies of scale:

When firms have to lower their scale of operations, they face certain accompanying disadvantages. The cost of operations increase subsequently and they get excluded from various benefits that they were earlier entitled to. For example, let’s say that a firm procures raw materials from a supplier at these rates- at $50 dollars each up to 100 units and $40 dollars each up to 500 units. If the firm had to downsize from purchasing, say 200 units to 100, their cost of production per unit of output increases as the per unit input cost rises from $40 to $50. This lowers margins for MSMEs and decreases their profits.

Furthermore, in an effort to promote digitisation and reduce the use of cash, the Government introduced policies that led to MSMEs losing out on business. Small businesses are often at a disadvantaged position because they do not have the benefit of economies of scale as they produce goods at a small quantity. That is why the transaction cost of MSMEs is often very high and they resort to cash transactions to reduce the extra transaction cost. So, during the pandemic, they faced a shortage of cash to carry out their business operations.


3. Unavailability of loans:

'Repo rate' is the interest rate at which the central bank of a country lends money to commercial banks and 'reverse repo rate' is the rate at which the central bank of a country borrows money from commercial banks within the country. When an economy is in recession, one of the fiscal policies that any government usually undertakes is to decrease the repo rate and reverse repo rate to increase the money supply in the economy to facilitate economic growth and stabilisation. As a result, people can borrow more resulting in an increase in investment and consumption demand. However, in India, it was found that the commercial banks were reluctant to extend loans to a large share of MSMEs as they were perceived to be “risky, and their confidence in repaying those loans were not shared by most commercial banks. However, the big industrialists faced no obstacles in this area. The competition that resulted was therefore unfair to the SMEs. Without any available source of capital, they had to cut down operations, leaving millions of people hapless and unemployed.


POLICY ADVISORY TO COMBAT THE SITUATION:

The damage that has been caused to the MSMEs needs to be repaired as soon as possible. Some of the measures that the government can take are:

  • Lending credit to MSMEs at a negligible rate of interest, providing raw materials at a subsidised rate and ensuring unemployment benefits to all the workers who have been left unemployed due to the pandemic. This will help the MSMEs to recover some of the losses that they have made and will help sustain the businesses. Once the cost is substantially reduced due to government interference, the revenues will increase which will improve the financial position of the entrepreneurs and the workers. This profit will be used as investment that will make the economy stronger.

  • Encouraging education and awareness about implementation of technology, so that those who are not comfortable in using digital techniques can incorporate such methods in their business. For this, the government can set up training camps and make proper infrastructure available to MSMEs at a reduced price,

  • Healthy workers are more productive. Therefore, providing nutritious food, safe drinking water, masks, sanitizers and safe shelters to the displaced and unemployed workers should be the Government's responsibility. In order to reduce the transmission of COVID-19, it is imperative to maintain extremely hygienic working and living conditions. That is why, enforcing the safety measures should be of utmost importance in a populous country like India.


ACKNOWLEDGEMENT:

I would like to express my sincere gratitude to Prof. Ambar Nath Ghosh who kindly consented to discuss this topic with me in detail.


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