Opinion

Small units in distress as pandemic drives away business

Tulsi Jayakumar | Updated on April 24, 2020

MSMEs grappling with lower order book, rising inventories of finished goods and raw materials, and lower capacity utilisation

As nations across the world fret over the impact of Covid-19, the pandemic seems to be set to hit hard India’s most economically vulnerable enterprise group — the micro, small and medium enterprises (MSMEs). The MSME sector, comprising 6.33 crore enterprises, is predominantly ‘micro’ (99.4 per cent), with small and medium enterprises accounting for 0.52 per cent and 0.007 per cent of the sector respectively. We undertook a survey of MSMEs a week before the announcement of the lockdown, to estimate the impact of Covid on current and future business and the sector’s response.

SOS from MSMEs

The survey of 112 representative MSMEs revealed lower order books, increase in inventories of finished goods and raw materials, as also lower capacity utilisation — all pointing to a slowdown in activity. The survey looked at the nature and extent of the possible impact.

About 50 per cent of the MSMEs surveyed reported lower order books in Q4 2020 (January-March 2020) compared to the corresponding quarter in the previous year, as also compared to the previous quarter (Q3 2020), 29 per cent expected order books to shrink by more than 50 per cent. About 25 per cent of those surveyed reported a 20 per cent increase in finished goods and raw material inventories each in Q4 compared to the previous quarter due to Covid, and 17.5 per cent reported 50 per cent lower capacity utilisation compared to the previous quarter.

However, paradoxically, while 72 per cent agreed (strongly) that their receivables had been affected by the pandemic, an overwhelming majority (78 per cent) felt that their receivables would be affected only up to 30 days. Most (75 per cent) reported only a small loss in cash flow in Q4; yet, more than 51 per cent reported that with current cash flows, their business could last no more than three months if the pandemic persisted. Again, paradoxically, 56.3 per cent respondents expected the impact of Covid on their businesses to last no more than three months, while another 28 per cent expected the impact to last up to only six months.

How does one interpret these results? The absence of a tangible policy response such as a declared lockdown, led to most respondents failing to factor in the true nature and impact of Covid. In this sense, the MSME distress call could only be greater in the aftermath of the lock-down.

The survey also revealed the global inter-connectedness of the Indian MSME sector. More than 50 per cent of the respondents confirmed that the pandemic would impact their global sourcing, while an equal proportion confirmed the impact on their global markets. Thus, any volatility in global markets would prove to be a double-whammy for Indian MSMEs.

Jobs on the line

The survey revealed the high employment-elasticity of the MSME sector. At the national level, statistics point to 97 per cent of the total MSME employment being generated in the micro sector, 2.88 per cent in the small and 0.16 per cent in the medium sectors. This was corroborated by our survey as well. Thus, ‘small’ manufacturing plants and service firms across India typically provide employment to 300-700, while most ‘micro’ manufacturing enterprises employ 20-50 people, with micro service enterprises employing a lesser number.

It is this employment which would bear the brunt of the pandemic. The largest item constituting financial burden according to the respondents was labour costs (34 per cent). This was followed by raw material costs (18.8 per cent) and interest on loans (18.8 per cent). Faced with distress, SMEs would opt to survive, and the first casualty would be a cut in labour. Anecdotally, the number of SMEs keen on seeking counsel for dealing with tricky labour contracts when sales have dried up, has increased.

Such cuts in workforce would however exacerbate the already precarious situation and make recovery even more difficult. For, employment drives consumption demand and hence growth in the economy, besides affecting the overall confidence. Just as it would be foolhardy to cut one’s arteries to lose weight, in much the same way, businesses would be ill-advised to cut employment for the myopic purpose of surviving.

While government financial incentives and packages are the need of the hour to ‘save’ the SMEs, the SMEs themselves need to heed to the economy’s distress call and understand their role in saving the economy. Inefficient SMEs, seeking self-preservation through government relief packages at the cost of labour, may rightfully be allowed to succumb.

The writer is professor of Economics and Chairperson, Family Managed Business, at SPJIMR, Mumbai. Views are personal.

Published on April 24, 2020

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