MSMEs in Covid 19

As the pandemic endures, all the fears about the impact of lockdown on SMEs and the problems for recovery appear to be turning true. 

Here are the findings of a survey by industry associations of 46,525 MSMEs, self-employed, corporate CEOs, and employees conducted online between May 24-30,

While 35 per cent of Micro, Small and Medium Enterprises (MSMEs) and 37 per cent of the self-employed respondents said their enterprises were beyond recovery, 32 per cent of MSMEs said recovery would take six months. Just 12 per cent expected a recovery in less than three months... The AIMO survey also showed that only 3 per cent of MSMEs, 6 per cent of corporates, and 11 per cent of the self-employed respondents stated they will stay unaffected and will continue to do well, primarily since they were engaged in supply of essential services during the lockdown.

And highlighting the gravity of the situation, industry leaders point to never having witnessed such a situation since the independence. 

Good series in Business Standard on the problems faced by MSMEs. 

1. This about Meerut, one of the largest industrial hubs, with 17000 industrial units. Quarantine allows only a third of workers in factories with more than 50 workers. Meerut is the largest export hub for sports goods and the second largest sports good manufacturer (after Jalandhar) with 3000 units employing more than 25000 workers. 

Earlier this week, the Meerut Industrial Development Forum suggested to the MSME Ministry that the GST refundable from the government or recoverable from sales billing should be financed by the banks while instalments of term loans payable next year should not be classified as a current liability.

Yet more reason to fast-track the implementation of TReDS!

This about a firm in the Kainchi industry,

Away from the industrial din, in the narrow alleys where it has flourished for 350 years, one of Meerut’s most resilient exports – the metal scissors industry of Kainchi Bazaar - may quietly die. It has weathered many a challenge over the years, from a lack of trained hands to tight price competition by Chinese firms. But the lockdown has pushed many to the edge of the precipice. “Many don’t even have enough funds to repair the rudimentary instruments that we use for sharpening and welding. I haven’t got a single payment in the past five months,” said Mohammed Rais, a scissor maker who employed 15 people till February. All but three have left. Rais is the third generation in his family to practise the craft. It looks as though it will end with him.

2. This about Surat's textiles and diamond industries. 

The textile industry is hobbled by disruptions along the value chain which has clogged up cash flow, and the flight of skilled migrant labour. In the diamond industry with 6000 polishing units employing over 700,000 workers with annual turnover of Rs 1.8 trillion, less than 100 have reopened.

3. This about Kundli industrial area in Delhi-Sonipat border which employs nearly 200,000 people in stainless steel industry. 

On practical difficulties with social distanced work,

“Look at my factory floor. Do you think my 175 workers can work together and still maintain one meter distance,” asks the owner of a factory that makes packaging for medicines and is working with about 50 people now. “The demand is tepid now, so we can manage with less production and people. But when demand improves, it will be difficult to adhere to social distancing guidelines. It is easy for policymakers to ask us to have shifts and rotation of employees, but these rules are difficult to execute,” he says.

This goes to the heart of the matter,

Subhash Gupta, chairman of the Kundli Industrial Area, says it is contradictory on the part of the government to send labour back home while asking industries to restart operations. “The government is offering us loans. We do not need loans. We need infrastructure — better roads and electricity at reasonable costs,” says Gupta, adding that the loan scheme is to help the “big guys, not smaller industries.” The call for “Vocal for Local” and indigenous products would be possible only when industry is supported through low-cost infrastructure, he adds.

With good physical infrastructure, skilled manpower, and ease of doing business, the problem of competitiveness largely declines to the margins, and therefore also the need for subsidies and other government dole. 

4. This about Wagle industrial area in Thane, with nearly 200 manufacturing units in engineering and electronics, pharmaceuticals, and textiles, and large factories of several big brands. The area is struggling to reopen on the back of labour shortage and also face cash-flow crunch.

This is a good caricature of India's declining manufacturing fortunes,

Over the years, the 58-year-old estate that once was home to 800 manufacturing units, has lost its charm to high real estate costs, traffic snarls and a dearth of blue collared workers.

This about the design problems with the Government's MSME package,

Sandeep Parikh, vice-president, Chamber of Small Industries Association (COSIA) goes on to say that instead of a moratorium on loan repayment, which will increase the overall cost of funding for ailing industries, steps like interest subvention and part payment of salaries by the government would have been of help. Others agree. Says Akolawala: “The government package is all about loans, so it won’t benefit us in any way.” Instead, a GST reduction would have been of greater help as it would have given the units some liquidity to meet other fixed and operational costs, he adds. Experts, too, feel that the government package for the MSMEs is a damp squib as none of measures are direct or aimed at reviving demand at the user industry level.

5. This about Ambattur Industrial area near Chennai, which house numerous MSMEs servicing large engineering companies, is struggling with skilled labour shortage and problems due to supply-chain disruptions.

A uniform theme from everywhere, dissatisfaction with the government's MSME package, in particular at the lack of fiscal support which would share some of the costs inflicted by the pandemic lockdown.

The former Finance Secretary, Mr Subhash Garg makes the case for a Rs 3 trillion fiscal support for SMEs to cover the permanent losses suffered, including wage subsidy for 2-3 months for Rs 2 trillion and business (non-wage) fixed cost support for Rs 1 trillion to the 80 million estimated non-farm agricultural, industrial, and services MSMEs He also explains why the proposals on credit guarantee has limited relevance for the sector as a whole - just 16% of the Rs 69.3 trillion MSME credit demand was met by formal financial channels.

However, his solution to provide grant support to MSMEs in return for them to incorporate formally and start filing annual returns (of any kind) is unlikely to work. In fact, as this blog has consistently pointed out, it is counter-productive (neither possible nor desirable) to force or nudge informal businesses to become formal. They are informal for a reason which cannot be regulated or subsidised away. It is the reality of the stage of economic development of any country.

Update 1 (07.06.2020)

Problems start to surface for MSMEs trying to access the Rs 3 trillion government guarantee loans to 4.5 m units.

Story of three MSMEs who repurposed activities to respond to Covid 19.t