In the shock of the pandemic, important lessons for MSMEs

Micro, Small and Medium Enterprises (MSMEs) are vital for achieving the overall objectives of economic development. The sector has a significant contribution in terms of industrial production, employment generation and share in GDP and exports. But despite several initiatives by governments since independence, the region continues to face challenges in its quest for survival and development. The COVID-19 pandemic has further exposed the vulnerability of the MSME sector. During the pandemic, the sector was the worst affected due to demand and supply shocks and subsequent measures taken to contain the spread of the infection. The region is still struggling to survive and recover from the aftershocks induced by the pandemic.

the impact of the pandemic

Let us focus on the impact of COVID-19 on MSMEs. A recent study (by the authors) – a primary survey of 225 small firms based in the National Capital Region (NCR) and Uttarakhand – observed that around 90% of small firms saw a decline in turnover in FY 2020-21. About 53% of the firms faced a drop of more than 50% in their turnover. About 29% of firms reported the collapse of their businesses. Around 53% saw demand slack, while about 36% faced erratic supply of raw materials.

The main reasons for the decline in business include restrictions on economic activity and mobility; decrease in demand; shortage of raw materials; trade restrictions; slow recovery of markets; delay in payment and labor shortage, among others. These firms faced a 25% reduction in their employment, especially in the informal workers segment which was around 47%. The major challenges that the firms faced in their revival included the issue of delayed payments; less demanding; lack of financial resources; supply chain disruption; increased cost of production; Shortage of skilled workers and, most importantly, business uncertainties.

Although most of the firms were aware of the initiative under the ‘Atmanirbhar Bharat’ package, only half of them got any help from it. Given the lack of demand and business uncertainties, firms did not find it logical to take advantage of the financial assistance available under the ‘Atmanirbhar Bharat’ package. Most of the firms suggested that the government should have focused more on reviving demand for products and services.

lessons for resilience

Still, not all firms have been hit by the pandemic-induced slowdown. About 10% of the firms under study reported either an increase in their turnover or no change. The key areas operated by these firms include human health activities; Manufacture of pharmaceuticals, medicinal, chemical and vegetable products; food and beverage service activities; and manufacture of garments, etc. The owners of these firms also reported that they tried to adapt quickly to the use of the e-commerce platform and even switched to other business activities that had demand – i.e. production of masks, sanitizers, home delivery products, etc. He took advantage of the opportunity by using his savings to invest in areas that offered new opportunities. It highlights that the resilience of a firm depends upon its financial resources and ability to invest in new technologies or new business opportunities. Unlike larger firms, the firms that suffered losses lacked a financial plan for business uncertainties to address weak shocks.

Planning ahead

COVID-19 is neither the first pandemic nor is it going to be the last. Even during the first two decades of this century, the world went through some other pandemics, viz. SARS in 2002-04, H1N1 influenza in 2009/swine flu influenza in 2009, MERS in 2012 and Zika virus in 2015-16. Among them, COVID-19 has been the worst. Apart from the pandemic, there were other factors such as sudden changes in government policies, wars and natural disasters such as floods and droughts, etc., which created business uncertainties and affected small businesses. Moreover, most of the MSMEs are in the informal sector who lack the required financial documents to register and avail such benefits. These firms are at high risk of closure after a large-scale disaster or economic shock. Therefore, there is a need to develop a mechanism for MSMEs that will help them avoid closure and support their revival during business uncertainties caused by economic shocks.

To make the MSME sector resilient, we propose the provision of emergency fund for small businesses which should be made mandatory from the very beginning. Similar to the Public Provident Fund, the government may launch a ‘Uncertainty Fund for Small Businesses’. This fund can be used to meet the financial needs of small firms during times of business uncertainties. It can be linked to the turnover of the firms – a firm can maintain a certain fraction of its turnover to meet the needs of this fund. Though it will be a ‘forced saving’, it will be very useful for MSMEs during business uncertainties due to economic shocks. The government should encourage small firms by assuring them of attractive returns on investment through this fund. In addition, the government can also contribute to the corpus fund as part of the contribution of MSMEs to firms up to a certain limit of turnover.

Another solution can be a ‘small business insurance plan’ which can be similar to term insurance. Lessons need to be taken from crop insurance scheme. Since there are more than 6.4 million MSMEs in the country, there is huge market potential for the insurance sector, if such a plan is properly formulated. In order to encourage firms to invest in such insurance scheme, the government may pay the initial premium or a part of the premium on behalf of such enterprises, especially micro enterprises and own account enterprises.

gap in budget

Though the Budget 2022-23 seeks to lay a foundation and a blueprint to drive the economy in the next 25 years (eternal time), it has failed to bring out any plans/ideas that make the MSME sector resilient. The proposed financial measures suggested above, namely, ‘Uncertainty Corpus Fund for Small Businesses’ and ‘Small Business Insurance Scheme’, can help MSMEs to become resilient and sustain their growth during business uncertainties caused by economic shocks. Huh. This can enable smaller firms to meet their working capital requirements, especially to maintain their workforce, and to invest in new technology or new business opportunities to deal with uncertainties. In terms of planning, MSMEs can be on par with large firms. This will boost the confidence of small firms during normal business hours and make them more competitive by giving them a sense of security in times of an unusual business cycle. It will also be of great help to the government in times of crisis as the government can focus on addressing the demand issues which is one of the biggest challenges facing the economy during a shock.

Akhilesh K. Sharma is a Faculty at Institute for Studies in Industrial Development, New Delhi. Sushil K. Rai is a faculty at the University of Petroleum and Energy Studies, Dehradun. Views expressed are personal