COVID-19 VICTIMS: Small and medium units like Zarak Moulders which manufacture water tanks are among the worst affected, as there is a drastic fall and demand and not enough space to observe Covid-19 protocols.
By Arvind Pinto
Small and medium business units have been worst hit by the three-year long Covid-19 pandemic, as there is no scope of following Covid-19 protocols like maintaining physical distance. Moreover, since mother industries like that of the automobile industry are facing a down turn, in turn there is no demand for the products of small and medium business or industrial units.
FOR most of us the term MSME does not mean much. But the Micro, Small and Medium Enterprises (MSMEs) constitute 50% of our manufacturing economy. Studies and surveys have shown that 95% of this sector was negatively impacted when the national lockdown was first imposed in April 2020. Seventy percent of the businesses still remained disrupted till August 2020 and even with the progressing unlocking, almost 40% of business activity remains affected. It would be interesting to have a look at the impact of the coronavirus pandemic and epidemic levels on this vital segment of the economy
In a developing country like what India is, the micro, small and medium enterprises are an important segment of the economy. By way of definition, one would ask, How does one categorize the MSME? In May 2020, in the wake of covid, the government of India amended the definition of the MSME sector. The investment limit for the micro manufacturing and service sector is now Rs1 crore. Up to Rs10 crore investment is the benchmark for the small manufacturing and service sectors. While up to Rs20 crore is the threshold to qualify for a medium-sized manufacturing or service sector. The turnover limit for the three sectors is Rs5, Rs50 and Rs100 crore for the three sectors, respectively. While raising the limits the government has taken note of inflation, the need for modernization of equipment and the need of an economy of scale to make these units profitable.
GDP OF MSME’S
STUDIES have found that the MSME’s share of the gross domestic produce is 30%. There are 633.88 lakh MSME’s in the country, of which 31% are in manufacturing activities, 36% in trading and 33% in other service sectors. Another interesting fact is that 99% of these units are in the micro sector, whereas only 1% of these units are small or medium sized. 51% of these units are in rural areas, with 49% in our urban centers.
Covid-19 has had a major impact on this sector. The strict lockdown last April 2021 had the biggest impact on particularly the smallest of these firms. This sector suffered a 55% loss in employment, where production fell from an average of 75% to just 11% and around 17.2% of their annual sales loss. There was a total breakdown of the supply chain leading to a delay in the receipt of raw material, with the consequent retrenchment of labour, falling income and a consequent loss to adequate credit facilities.
THE declining manufacturing output in the MSME sectors adversely impacted employment in these units. The Centre of Monitoring of the Indian Economy (CMIE) in its statistics indicated that this sector created 40 million jobs in 2019-20. During the Covid period there was a loss of 15 million jobs. Every major manufacturing industry except the pharmaceutical industry continued to employ less people due to the prolonged lockdown and uncertainty of production. While there was a freeze of more than 60% of economic activity in manufacturing firms, agricultural related firms as also agriculture continue to function. Thankfully this has helped in the supply of food supply in the economy, although the disruption of the supply chains has resulted in the increase in prices of several agricultural products.
According to a business report in Business Line, a 5% fall in the gross domestic product for the year 2021-21 has resulted in decrease in the revenue of Indian corporates. The MSME sectors have faced a more severe fall in revenue. Statisticians see a revenue fall of more than 21% in this sector. The fall in revenue will impact the creditworthiness of these enterprises, making it difficult to obtain credit at competitive rates.
Many of the small units that I studied revealed that one of the important factors today is the cash crunch. With the gradual dismantling of restrictions, demand for many of these products and services is on the upswing. However, there is a severe cash crunch, since the bigger firms, and even governmental enterprises are slow in making payments. Banks flush with funds prefer trading or placing their excess funds in a reverse repo with the Reserve Bank rather than putting use of these funds in the market. The appraisal of credit analysis of many of these firms and the risk factors that banks take into account make many of these firms poor candidates for credit.
Banks therefore attempt to increase their lending rates, while insisting on greater securities, making credit a difficult proposition to many of these firms. The cash flow of many of these smaller firms had collapsed during the period of demonetization and several of them have not fully recovered. The additional burden of GST and the need for keeping accounts have put an additional burden on the micro sector.
Studies by several economists have indicated that in the last financial year that will be ending on March 2022, there was a 70% drop in the turnover of most MSME units. Over 2– 2.4 lakh workers were retrenched and permanent and regular workers were receiving only 50% of their salaries.
ON a macro all India survey, the following were the major findings.
- With the disruption of supply chain there is a decline in the income of the MSME enterprises.
- There is an adverse cash flow among the MSME units.
- The increase in transportation costs, with rising fuel costs, has resulted in the decline in the profit margin of these units. Sadly, many of the micro units are not entitled for governmental support due to the non-availability of information on these enterprises. Several of these units have closed down, while several more are on the verge of shutting shop.
Unless there are urgent policy measures to alleviate the problems of the MSME units, the future appears bleak in the recessionary economy that India is today facing. Let’s hope that the budget with its promise to revive the economy will give hope to this vital part of the economy