Covid-19 crisis is choking India’s MSME sector. Business won’t pick up even after lockdown

Countries such as US, UK, Germany and China have announced quick relief for small companies. Perhaps finance minister Nirmala Sitharaman missed a trick or two.

Workers at a spice factory in Pune | Representational image | Udit Kulshrestha | Bloomberg

Finance minister Nirmala Sitharaman recently announced a series of measures for India’s industry as part of the Narendra Modi government’s effort to address the economic impacts of the coronavirus crisis and the resultant three-week nationwide lockdown.

While the government’s package of Rs 1.7 lakh crore promises some relief for companies under various sectors, none of the measures specifically addressed the needs of the MSME sector. Perhaps, the finance minister missed a trick or two in her announcement.

If there is one sector of the Indian economy that desperately needs immediate assistance, it is the micro, small and medium enterprises (MSME). It is seen as the backbone of the economy, accounting for a little under half of India’s manufacturing output. According to the ministry’s annual report for 2018-19, there are over 63 million MSME units in India.

While a relief package for the small companies may be on the anvil, the immediate announcement by the Modi government will keep them going through the tough times brought by a global pandemic. Time is of essence.

Seeking urgent relief

With over 100 million people employed — nearly 40 per cent of India’s workforce — the urgency of addressing the needs of the MSME sector can hardly be overstated. These small units, since they are nimbler than larger companies, have growth rates higher than that of the Indian economy and are also able to react to immediate needs of the region they are in.

That is why it was important for the National Highways Authority of India (NHAI) to release payments worth Rs 25,000 crore owed to the contractors this week. It helps put money into the hands of smaller companies and their employees as they try to find a way to live through the slowdown and the 21-day lockdown period.

Over the last few quarters, several industry bodies have approached the Modi government to raise the issue of the payments — which the government-run companies and departments owe them — being stuck due to procedural delays.

As the first half of the financial year 2019-20 came to a close on September 30, Nirmala Sitharaman had to step in to make sure payments were released to the vendors of public sector companies. Economic growth was at its lowest for the NDA government. 

“Government should not sit on overdue payments,” Sitharaman was quoted as saying.

Getting payments in time is critical for small companies since they have to pay GST in the month after they raise their invoices. When their payments are stuck for several months, the capital cost adds to the inefficiency. For companies in the MSME sector, it could occasionally threaten survival. With taxes paid in advance and payments due from PSU companies, small firms have been facing the heat.

Industry-government dialogue

Whether it is realisation of pending bills or easier credit terms, access to finance is the biggest concern for small companies in these uncertain times. The Confederation of Indian Industry (CII) has announced to set up a fund specifically for the MSMEs to tackle the Covid-19 crisis.

While some of their payments have been cleared, the industry is demanding more. There is clearly a need for strong measures too. ASSOCHAM has sought access to finance at easier terms, which can serve as a lifeline. The industry body, which counts over 400,000 companies as its members, has also asked for a three-month relief from payment of GST, utility and other statutory payments.

A survey by another industry body, FICCI, of 317 companies found that 73 per cent businesses have reported a fall in the number of orders. During the survey, 50 per cent of the respondents said that their inventory levels were up at least 15 per cent or more.

An immediate announcement which could cut their cash outgo in the next few months will be a big relief for most small businesses. Cash, in these times, is king.

Policy to extend a helping hand

Several countries have been quick to announce relief for small companies. Some have also given benefits to freelancers.

Germany is readying a €40 billion package for small businesses, up to 10 people, and freelancers. The UK has announced grants up to £10,000 for eligible small businesses. Among the benefits that the US government has announced is loans up to $2 million at preferential rates. China, too, has announced to defer loan payments for its small businesses.

A similar injection of funds, through various measures, may be critical for India’s MSME sector too. It will help these companies stabilise their operations over the next few months.

With the large-scale migration of workers from urban centres to rural areas, small businesses are staring at more uncertainty. Restaurants, retail shops, hotels, personal care and grooming, and other similar small businesses may find it tough to get up and running immediately after the lockdown ends on 14 April. Since the supply chains are disrupted, manufacturing units may also find it tough to begin operations immediately after the lockdown.

With the coronavirus health scare not expected to die down any time soon, generating cash for businesses will be the next big challenge in the near term. Every day that the relief is not provided will add to the overall delay and further choke India’s small and medium companies.

The author has been a business journalist, having tracked markets & economy across print & television media. Views are personal.