Impact Of Covid-19 On Indian SMEs And Strategy To Reboot The Sector

Small and Medium Enterprises (SMEs), the backbone of a developing country like India, have the potential to rapidly fuel the economic growth at a national and global level. Yet, they remain largely untapped at various levels. Considering the informal nature of the sector, SMEs are often deprived of the crucial sustainable line of credit they need to grow as well as opportunities to enhance the skills of their workforce. On top of that, the COVID-19 pandemic has dealt a double blow to the sector—from both the demand and supply side. So, this blog will delve into these impacts and suggest ways in which SMEs can rise above the situation.

Few of the challenges from the supply side include:

1. Availability of workforce: Majority of the workers in the unorganized SMEs are not registered, and hence, are left out of the purview of government beneficiary schemes. This has resulted in mass migration of labourers from urban to rural areas. Thus, many companies are facing labour shortages currently. In addition, lockdowns and social distancing are further restricting the movement of people.
2. Supply of raw materials: Due to severe restrictions of movements of goods and people, the entire supply chain is facing shortage of parts and intermediate goods.
3. Disruption in capacity utilization: The curb on movements of goods and labour due to lockdown is likely to reduce capacity utilization.

 
Also Read: Covid 19 Economic Package: Implications For The MSME Sector

Few of the challenges from the demand side include:

1. Steep decline in demand: The lockdown and the resulting impact on the salaries and rise in unemployment have led to weakening in the demand for goods.

 

2. Liquidity crunch: The drying up of revenue stream and decline in consumer confidence might impact the raising of funds from the markets and getting loans from financial institutions.

According to a recent OECD Report, a pan-Asian survey among SMEs, held between March and April’20 by the Asia Pacific MSME Trade Coalition, showed that almost 50% of SMEs have less than a month or a month of cash reserves. Nearly 30% of SMEs expect to lay off 50% or more of their workers. Realizing the severity of the situation, the Indian government has announced various measures to stimulate the SMEs. Some of them include:

Also Read :How Unsecured Business Loans Help in Growth of SMEs

Financial Stimulus:

1. Rs 3 lakh crore collateral-free automatic loans for businesses, including MSMEs
2. Rs 20,000 crore subordinate debt for two lakh MSMEs which are NPA or are stressed
3. Rs 50,000 crore equity infusion through MSME Fund of Funds, which shall be operated through a Mother and a few Daughter funds
4. Revision in definition of MSMEs by raising the investment limit and introducing an additional criterion of turnover
5. E-market linkage for MSMEs will be promoted to act as a replacement for trade fairs and exhibitions
6. General Financial Rules (GFR) of the Government will be amended to disallow global tender inquiries in procurement of Goods and Services of value of less than Rs 200 crore

However, due to the unorganized nature of the SMEs sector, the above financial stimulus measures might not suffice. Therefore, here are some more ways to reboot SMEs:

• Comprehensive support programmes: The programmes should broadly cover strengthening of social safety nets, health insurance, and cash transfer schemes for the workforce.

• Effective delivery channels: SMEs can take advantage of the various digital platforms that will open up new vistas for generating revenues and operational efficiency.

• Ease of obtaining and receiving finance on a sustainable basis: Post the pandemic, small doses of short-term working capital will be required. Hence, smaller credit lines at the right time will have to be provided.

• Provision of training and skill development courses aligned with the requirements of the Industry: SMEs will need to harness the benefits of the Government of India initiatives like “Startup India” and “Skill India” that promote an entrepreneurial culture.

• Need for fintech in semi-urban and rural areas: The advent of financial technology companies has paved the way for convenient, fast, and transparent access to capital for SMEs. However, post the pandemic, it will be essential to expand the scale and reach of fintech in semi-urban and rural areas. This will ensure the equitable allocation of resources.

 
Also Read: Why Digitization of SMEs Is a Must for the Indian Economy

To conclude, SMEs in India have the potential to rapidly recover from the temporary slump and become profitable, as long as comprehensive structural and financial measures are implemented. Being aware of the current challenges, making the most of government initiatives, and keeping the above tips in mind can be extremely helpful.