The third wave of the coronavirus pandemic is expected to hit hard the already stressed Micro, Small and Medium Enterprises (MSME) segment in India. The last couple of years have been challenging for the MSMEs, as many were forced to shut down during the period, or lay off their employees. According to industry experts, there is no exact data recorded on the magnitude of this phenomenon. Though the death rates during the second wave were extremely high, the economic impact was milder than the first wave. Now, with the third wave seemingly around the corner, the fallout from any type of restrictions to control the virus might disrupt the recovery of the MSMEs, and the level of disruption would be known in the coming weeks.
“Small businesses are already under pressure, their margins squeezed by the soaring input costs and cash flows impacted by the delayed payments from the government and the private sector. To date, more than 57 per cent of applications by MSMEs with regards to delayed payments, from the government and the private sector, remain unresolved under the MSME Samadhaan platform, since its launch in October 2017," remarked Arun Singh, global chief economist, Dun and Bradstreet.
According to Singh, data from the RBI showing signs of stress in the bank loans to MSMEs emerged by September 2021, much before the outbreak of Omicron. Proprietary data by Dun and Bradstreet shows that operational risks remain high in the sectors which are dominated by SMEs in September 2021, compared to one year prior. That is, before the second wave. The Dun and Bradstreet Global Business Ranking, which predicts the likelihood that a company will go out of business, become inoperable, or inactive over the next 12 months, remains elevated in sectors such as textiles, paper and print, textile, retail and construction sectors.
“Small businesses who were in the nascent stage of recovery would thus be severely impacted as the current surge in cases suggests that strict restrictions and even localised lockdowns cannot be considered as a distant possibility. MSMEs have already faced severe financial crises during the previous two waves, and thus would need special incentives, loan restructuring and moratorium, adding to the fiscal strain of the government and extension of monetary policy support,” added Singh.
MSMEs contribute around 30 per cent of India’s GDP, employ about 11 crore people, constitute nearly 40 per cent of total exports, and more than half of them are located in rural India. The government is keen to revive this sector to achieve inclusive growth, thereby attaining self-reliance.
“An analysis of CMIE Prowess database reveals that the Indian MSMEs mainly rely on unsecured loans, and take few long-term loans for capital expenditure. Lack of sufficient asset cover [collateral] discourages them from taking secured loans at lower interest rates, and hence they have to rely on unsecured loans at higher interest rates. This dents profitability and economic viability of their businesses," said Girish Linganna, an aerospace expert and the director of ADD Engineering Components India Limited.
Linganna points out that many MSME firms in the aerospace segment have also been impacted by the pandemic. "The supply lines of aerospace component manufacturers have been hit after the recent increase in infection cases across the country. Due to disruption in supply lines, HAL has already indicated a possible delay in the delivery of 10 Tejas MK1 jets," he said.
It is a well known fact that, with the help of a series of support measures, Indian MSMEs rebounded from the second quarter of 2021-22, after the second wave. The Emergency Credit Line Guarantee Scheme (ECLGS) proved a lifeline for the sector. It provided 20 per cent collateral-free additional loans to existing borrowers at very low interest with liberal payment terms. Over 1.3 crore MSMEs benefited from it.
“Prior to the current wave, MSMEs faced twin challenges of high raw material prices and financial stress. Prices of metals and plastic raw material increased by 40 to 50 per cent over the last year, making it difficult for most of them to fulfill prior commitments and squeezing their cash flows. The third wave may delay the recovery. MSMEs expect the [Union] Budget to provide relief in raw material prices by reduction of tariff and non-tariff barriers, and help improve their cash flow,” Mohan Suresh, the chairman of Federation of Indian Micro and Small and Medium Enterprises (MSMEs), told THE WEEK.
Many other representatives from the MSME segment with whom THE WEEK spoke voiced their concern about the growing COVID-19 restrictions. Many feel that the Omicron variant is a cause for great anxiety for the sector and for the economy as a whole, as it had already been facing challenging economic conditions in recent times.
"No business today wishes to suspend its operations as they have been on a path to recovery. Every time the operations halt, it takes an immense amount of hard work, a huge amount of money and a lot of time to restart the operations all over again. The workers, who would be devoid of any income due to the suspension of the operations, may prefer to return home. Such a situation will surely cause long delays at many of the small manufacturing units and in turn affect the large enterprises. Any prolonged shutdown may lead to reverse migration of labour and will prove to be a death knell for many of the already struggling MSME units,” remarked Namish Gupta, MD (Asia) of Annanta Source, a US-based firm that has operations in India.
Many MSME representatives echo the same sentiments. "It is well documented that the business of the MSMEs suffered a debilitating impact in the aftermath of the second wave. If the impending third wave of the pandemic is to hit the businesses, then that will be the final straw. That will have a cascading impact on businesses and employment creation, which is crucial in sustaining our burgeoning HR capital. We hope that the state governments across the country exercise due caution, especially with the proposed lockdown model, as this will completely devastate and trample the green shoots that are emerging among the MSME sector. The MSME sector has to grow as it is the biggest revenue contributor to the national exchequer, and, in turn, contributes to the GDP growth,” remarked B.S. Srinivasan, vice president, Laghu Udyog Bharati Karnataka.
Srinivasan said that, instead of the lockdown option, the government should ramp up its medical support and improve vaccine coverage. “This will automatically taper the impact of COVID and Omicron, and will directly save the MSME sector from falling off the cliff,” he said.