COVID-19: Why reviving MSME sector should be top priority for Indian economy

With the COVID-19 crisis forcing blanket lockdowns across nations, the global economy has taken a massive hit. The IMF has described this economic downturn as the worst since the Great Depression of the 1930s with Chief Economist Gita Gopinath suggesting the crisis could eat up to $9 trillion of the global GDP over the next two years.

The situation is particularly grim for small and medium-scale businesses. Unlike large corporations, smaller enterprises depend on regular cash inflow to stay afloat, and have limited to no cash reserves to survive prolonged suspension of work. Most MSMEs are already struggling to pay salaries and run their daily basic operations.

A recent survey estimated that around 47 percent of Indian startups and SMEs have less than one month of cash left, and 27 percent are already out of funds. Many others are looking for strategic and transformational changes in their business approach to stay relevant and survive the slump.

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MSMEs: Backbone of the Indian economy

The Micro, Small and Medium Enterprises (MSMEs) form the backbone of India’s economy. This sector contributes to a whopping 30 percent of India’s GDP, and employs an estimated 28 percent of the labour force, supporting livelihoods of over 100 million people. Estimates suggest that the sector created around 13.5 million to 14.9 million new jobs per annum between 2015 and 2019. 

The need to prioritise the MSME sector’s survival and revival cannot, therefore, be underlined enough. However, this needs a concerted effort from the government and the businesses to be able to survive and revive post the crisis.

Bailout packages

The government is already mulling a bailout package for the sector with reports indicating that a proposal to guarantee Rs 3 trillion of loans to small businesses might be in the works. Union Minister for MSMEs Nitin Gadkari has also indicated that a corpus of Rs 10,000 crore is on the way to buy up to 15 percent equity in MSMEs with high credit rating.

While these steps are welcome, we also need more widespread and intelligent measures to be able to help smaller companies weather this storm and stay afloat.

Make easy loans available

To ensure the survival of medium and small-scale enterprises over the next few months, it is imperative to provide the much-needed liquidity to keep their basic operations running. It is time to make easy and low-interest loans available to MSME sector immediately. The loan amount available for each organisation must be equivalent to at least two to three months of operational costs.

Such a credit guarantee will not only prevent small companies from going bankrupt but will also allow them to use the lockdown period to launch transformational initiatives such as reconfiguring their business model and shifting to producing products more relevant for the time.

For example, some companies have changed gears and shifted to manufacturing products such as masks, sanitisers, and other protective equipment during this time.

Other companies are adopting greater automation to help their workforce practice social distancing norms post the lockdown. Some businesses are mulling tweaking their business models and start delivering essential services to people. Such strategic shifts need investment and liquidity.

Easy credit availability will help many organisations save their businesses through strategic transformations. While some banks have already opened such emergency relief measures for the sector, we need wider credit guarantee schemes backed by the government.

Wage protection

With businesses in financial distress, employees are facing the threat of job losses or significant wage cuts. A wage protection scheme for at least three months is the need of the hour. If not complete wages, the government needs to support MSME organisations pay partial survival wages during these critical months. A constant wage flow will allow the sector to retain its workforce, keeping a large population from starvation.

Retaining the workforce will also allow companies to diversify their offerings to suit the needs of the time. To stay relevant, organisations need to conduct extensive research, analysis, and customer engagement activities.

A part of the workforce can be diverted to undertake brand repackaging activities and initiatives to prepare the business for a different future.

Financial concessions

To help organisations reduce expenditure during this critical time, the government must also consider deferring social security payments by companies. Suspending companies’ contribution to Employees’ Provident Fund (EPF) and to employee insurance schemes, including medical insurance for six months is a demand that is being raised from different quarters.

Finance Minister Nirmala Sitharaman had last month announced that the government will pay the entire EPF contribution of both the employer and the employee for three months, but limited this benefit for establishments with up to 100 employees and 90 percent of the employees earning less than Rs 15,000.  This can be extended to cover more organisations for a longer duration.

This step will allow organisations to have greater liquidity at hand to be able to survive the cash crunch and restart production after the lockdown is lifted. Similarly, exemptions in paying GST for six months can also be considered for the MSME sector.

Resuming logistics and supply chains

With all travel and movement halted, the supply chain and logistics framework also crashed during the lockdown. Apart from the shortage of raw materials, companies also face an inability to deliver finished products to retailers and end-consumers.

On top of it, with hordes of workers migrating back to their villages and towns, organisations are now also facing a shortage of labour force. Shortage of trucks and drivers and a shortage of workers at loading and unloading points has proved to be a major challenge.

Overcoming these challenges is paramount if the MSME sector has to restart its manufacturing and supplies quickly. Even if the lockdown is lifted only partially over the coming weeks, a clear plan needs to be outlined to ensure that supply chains are resumed and workers are brought back to the manufacturing units.

Mechanisms need to be created to find daily wage earners who are desperate for work and transit them to the manufacturing units that need labour force. The sector also needs help with warehouses and inventory management facilities.

No one knows when the COVID-19 crisis will end. But what is clear is that both businesses and the government need to come together to work towards repurposing business plans, restarting business operations, and protect employees and workers to ensure their survival.