This Article is From Jun 08, 2020

Hung Out To Dry - The Blood, Sweat And Fears Of MSMEs

The Consumer Pyramids Household Survey of CMIE estimates that employment fell by 114 million in April 2020, which was a 29% further drop in their estimates of unemployment from March when unemployment levels were estimated to be the highest in the last four years. Distressingly, the economic carnage of Covid-19 hit hardest those who earn a living by working on a daily wage, or have own account engagements like hawkers or street food vendors.

The CMIE survey further says that 23% of smaller businesses, or about 18 million business persons (those with fixed assets and facilities), have also reported livelihood losses. Businesses run on the concept of 'going concern' which assumes that a business will run for an unforeseen length of time, basis which its loans and other arrangements run seamlessly. The sense of continuity is vital for a business. Once that continuity is broken, while loans and liabilities are demanded immediately, the collection of receivables is delayed; some assets may even need to be liquidated. Hence, a small business person's back is against the wall and she has nowhere to go.

The lockdown for smaller or even larger businesses has completely altered the operating environment, leaving them grappling with a complex web of existential issues of sustenance, business shocks and reality, analysing whether demand is temporarily or permanently suspended, the means of financing the next business cycle and most importantly, how long this downward spiral will last.

It did not help when the government issued an advisory and later, an order, in March 2020, asking businesses to continue paying salaries to workers even during the lockdown. MSME businesses can hardly pay wages for two months without their production process functioning and without expectation of some intervention or relief from the government or lenders for making these payments.

MSMEs form the bulwark of Indian businesses. Yet, whether these are own account enterprises or they employ staff, MSMEs have their own challenges of lower TFP than comparable economies, lack of size and scale, higher cost of capital, etc. Even before the Covid-19 pandemic, this segment was facing a downturn and was under intense pressure, needing a transfusion of reforms to keep them afloat. The lockdown and its aftershock have dealt a crippling blow and many of such enterprises will not reopen for business any time soon as demand has simply evaporated and much of the labour they used has migrated. Needless to say, the knock-on effect of such closure will reverberate in labour markets and the overall economy for a while.

For some businesses like hospitality, tourism, travel, ride sharing, etc. Covid-19 has brought about a structural change, while some services such as those that cater to lifestyle needs or depend on discretionary spends like personal services, trade of non-essentials, real estate, professional services, even financial services, are temporarily lost and will limp for months to return to pre-Covid-19 levels.

Hence the expectation from the government for an economic revival package was intense. The stimulus package announced for business is largely futuristic and a number of reforms for agriculture like enhancing farm income, creating e-markets, etc are path-breaking, true, but for MSMEs, it gives little impetus or fuel to kick start business. Reserving tenders up to Rs 200 crores for Indian businesses is a wonderful step but results will not be immediate or even medium-term. The virtuous announcement that the government will pay dues of business within 45 days is unfathomable, as contractually they often need to pay before that period. Most small businesses see the package as a highly-touted reforms package with an electoral slant rather than one which revives them from the impact of Covid-19 pandemic.

MSME businesses in India have low liquid assets and when the business cycle is involuntarily suspended (like in this lockdown), cashflows get strangulated, demand is lost and debts or liabilities pile up. The assumption that availability of credit to businesses will eventually spur demand is not realistic. In order to survive, businesses go into contraction mode, conserve cash, optimise on salaries (including letting go of staff) and establishment costs and operate at a far lower capacity till the markets look up. In such a case, one does not borrow even at lower rates to take a punt on the future unless there is a clear path to growth and certainty of revival. Service-providing businesses may not need immediate cash but need to see upbeat business confidence for growth revival. 

Immediate term expectations of MSMEs:


Government should incentivise enterprises to retain and employ staff, pay utility bills, interest and establishment costs through a grant or allow weighted deductions, eg. allow 1.5 times such costs to be deducted for tax purposes or even allow all costs during the Covid period to be capitalised and depreciated over, say, 5 years or longer for specific costs. The purpose is to create float in the hands of enterprises to be able to invest in business. 

Indirect Tax intervention

- Lower the rate of GST especially for items that are manufactured or create value in the supply chain in India

- Extend the time period for depositing GST collections and TDS with the government to create greater float for businesses.

- Expedite refunds of taxes

Spur Demand

As a natural consequence of a major uncertainty like this, people tend to save money, which is reflected in bank deposits increasing by Rs 3 lakh crore in April 2020. Citizens may be given tax deductions for buying household assets to encourage consumption and stir up growth. Deductions may be on a sliding scale, with higher tax breaks on products of 'Atma Nirbhar' category. For the vast non-tax paying category of citizens, incentives may take the form of lower GST and making cheaper credit available for such purchases.

It is now accepted that this virus will be here for a long time. If every time an employee thinks s/he has been in contact with a COVID-19 positive person and the entire family is placed in 14-day home quarantine, productivity will take a stiff beating. Not only for the employee's workplace but for the workplaces of other family members too. MSME businesses cannot function with this level of uncertainty, not having the wherewithal of larger businesses. It does not help that there are multiple advisories which create confusion but do not provide clarity. A well-articulated single-source protocol is urgently needed.

It is understood that in a country like India, resources are limited and we cannot "spend out of hardship" like USA. Scarce resources need to be judiciously allocated with a view to gainfully engage lakhs of migrant workers who have traversed the country to perceived safety and soon need to be gainfully engaged; else we will be staring at another crisis. MSMEs form vital supply chain components or vital peripheral support for larger industries/urban centres, and their direct, indirect and induced effect on the entire economy and employment is colossal. This why supporting MSMEs to revive and fire growth engines is crucial for the Indian economy.

Unfortunately, small businesses who always respond to the clarion call of the nation, feel neglected and distressed at the lack of support extended to them at this time of such existential crisis and grieve at being hung out to dry in this summer of discontent.

(Kaushik Dutta and Kshama Kaushik are founders of Thought Arbitrage Research Institute, a micro enterprise researching on public policy matters.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.