MSME revenues projected to decline by 20-22 percent because of COVID-19: CRISIL
The COVID-19 pandemic has adversely affected the economy of the world. Businesses are trying hard to shift to the ‘new normal’ - going digital.
While COVID-19 has brought unique challenges, it has also brought fresh opportunities for India in the manufacturing sector. Foreign companies are now looking at India as an alternative to China where many suppliers have gone bankrupt because of the pandemic.
Isha Chaudhary, Director, CRISIL
In an interview with SMBStory, Isha Chaudhary, Director at CRISIL Ltd, says there are several ways how Micro, Small and Medium Enterprises (MSMEs) in India can speed up their recovery. Besides stressing on taking the digital route, Isha says the pandemic has also given an opportunity to MSMEs to expand their export market and leverage the same.
She spoke about the impact of COVID-19 on MSMEs, the sectors that are worst affected, and what the road to recovery looks like for this sector.
Edited excerpts from the interview:
SMBStory [SMBS]: What has been the impact of COVID-19 pandemic on MSMEs? Which are the worst-affected sectors?
Isha Chaudhary [IC]: At CRISIL, we track 70 MSMEs across 145 clusters. MSMEs have been hit in the first quarter. We project at least 20-22 percent decline in the revenues of the sector. The decline is higher in the export-linked sector. There is an immense drop in the textiles industry, gems, jewellery, and the automotive sectors.
The lockdown and large-scale labour migration have also impacted the construction and the real estate sector.
MSMEs were witnessing a modest growth of 4-5 percent since the last two to three years. That has taken a big hit as sales are not happening.
However, companies falling under the packaged foods category benefited from the crisis as demand for their products increased. Everyone was working from home and looking for ready-to-eat options.
SMBS: There is little hope of migrant labourers returning to urban areas soon. Is there a way to foster entrepreneurship in their native places?
IC: Most labourers have migrated to eastern and northern India. The trend that we have observed is that the government has been largely focusing on rural schemes. For example, investment in Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been increased from Rs 60,000 crore to Rs 1 lakh crore.
In the first quarter of this year, the government doubled investment in schemes aimed at uplifting the rural economy.
Additionally, we also saw people benefiting from employment generation in the construction sector in rural areas. In June and July, rural economy picked up led by labourers going back home, rural construction (MGNREGA created jobs), and healthy income from foodgrains.
SMBS: How can India leverage the prevailing scenario to become a global hub for manufacturing and present more products in the global marketplace?
IC: India is now becoming a key export hub and MSMEs should focus on export opportunities.
This is a blessing in disguise for us, a chance that we have got after missing the bus several times. For example, key economic reforms were introduced after the 1990s in India as compared to China, Brazil, Mexico, and Indonesia where reforms were introduced in the 1970s and 1980s.
Some push is also needed from the government’s side to achieve this. I have seen that acquiring land is a problem unique to India. Also lowering logistic cost and reducing the time taken in processes and paperwork can help capture some market share from China.
SMBS: Recently, the government announced some stimulus packages for MSMEs. How helpful have these relief packages been?
IC: The government did announce some big numbers. The six-month moratorium on loans, the Rs 3 lakh crore collateral-free loan, and the changing definition of MSMEs are good schemes. Out of the Rs 3 lakh crore rolled out, Rs 1.2 lakh crore worth loans have been sanctioned as of July 10, 2020. These numbers will help MSMEs recover.
Stimulus for MSMEs is a step in the right direction with the biggest support being in the form of Rs 3 lakh crore collateral-free loan; most of which would be directed to meet liquidity. Moratorium and restructuring will cushion the rising GNPAs in the sector.
SMBS: Why do Indian SMBs take so long to adopt technology when it could actually benefit them big time?
IC: The mindset of Indian consumers is cash-linked. According to a survey conducted by Yes Bank last year, only 5 percent out of 2,700 MSMEs have fully embraced digital adoption. This clearly shows that full-scale digital adoption among MSMEs is still far.
From our surveys, we have found out that digital adoption is generally weak in MSMEs. For years, MSMEs have continued to operate in cash but they need to understand that going digital will help them achieve better sales. Accounting softwares will help save time wasted in doing activities manually.
City-based MSMEs are smarter as they have adopted technology. The turnaround time to avail benefits rolled out by the government is also much better among them.
Digital adoption by MSMEs is pertinent for better customer reach, supply chain management, and improving operational efficiency. Availing online training modules, upskilling workforce to imbibe best digital practices, and deploying well-established use cases in areas where efficacy is required can be few easy tools.
SMBS: What does the road ahead look like for Indian MSMEs?
IC: India will potentially see a 10 percent permanent GDP loss on account of COVID-19 from FY20 to FY23, and it will take two-five years for some sectors to get back to normalcy. The Indian economy has started recovering.
MSMEs might grow in single-digit numbers; it will take time to get back the momentum. Lockdown and the freeze in production are behind us but the problem is not 100 percent over as yet.
Businesses must start with meeting domestic needs and then move to leveraging opportunities in the export ecosystem. They will also have to find smarter ways of running the business to improve operational efficiencies. Digital adoption is key in driving the recovery process for MSMEs.