Impact of Covid-19 on the Indian SME Sector

The coronavirus pandemic has been a body blow not only to the human population but to economies around the world. With the fourth highest number of Covid-19 infections as of June 30, India is no different. It announced an unprecedented and absolute nation-wide lockdown to control the spread of the virus on March 24. This brought the economy to a virtual standstill. Micro, Small and Medium Enterprises (MSMEs) were hit the hardest. Since April-end, lockdown restrictions have been gradually eased and industries have resumed work. But in the face of a galloping pandemic, the worst is far from over. The MSME sector, for instance, continues to struggle with cash flow, slowing demand and rising unemployment.

This blog takes a deep dive into the impact of Covid-19 on the MSME sector and tackles the following subjects:

• The definition of MSME
• Their contribution to the economy
• Problems faced by MSMEs during lockdown
• Relief measures sought by MSMEs
• What they got from the government
• Whether the relief package has been adequate

What is an MSME

In May, the government changed the criteria for what constitutes a micro, a small and a medium enterprise. It announced new definitions on the basis of investment (in plant, machinery and equipment) and annual turnover. Earlier, definitions were based purely on investment. These are the latest definitions:

• Micro enterprise: Investment up to Rs 1 crore, turnover up to Rs 5 crore
• Small enterprise: Investment up to Rs 10 crore, turnover up to Rs 50 crore
• Medium enterprise: Investment up to Rs 50 crore, turnover up to Rs 200 crore

As per the previous definitions, investment limits were Rs 25 lakh (micro), Rs 25 lakh to Rs 5 crore (small), and Rs 5 crore to Rs 10 crore (medium) for manufacturing units. For service-based units, investment limits were Rs 10 lakh (micro), Rs 10 lakh to Rs 2 crore (small) and Rs 2 crore to Rs 5 crore (medium). The revised definitions have done away with differentiating between manufacturing and service-based MSMEs.‍

MSME Contribution to the Economy‍

There are 63.4 million MSMEs in India, 51% of them in rural locations, according to the 2018-2019 Annual Report of the Department of MSMEs. They employ 110 million people. 

In December 2019, when the world was waking up to the Covid-19 threat, the contribution of Indian MSMEs to GDP (gross domestic product, or the sum of all goods and services produced in a country) was 29%. They comprised 45% of the manufacturing sector and 40% of Indian exports.‍

Lockdown Impact on MSMEs 

1. Financial obligations 

Despite the lockdown, these enterprises are obliged to pay salaries, rents and bills and pay their suppliers. 

2. Slowing demand

The sector was already struggling with slowing demand in the lead-up to Covid-19. Now, it is in the midst of a full-blown crisis. On the domestic front, people are buying less, and that too only essential goods. This is unlikely to change soon. In a survey of 4,000 consumers by the Retailers Association of India, published in June, 78% said their shopping expenses would decrease post-lockdown. On the export front, there are few fresh orders. This is because the United States and European Union account for a chunk of Indian exports and both have been battered by Covid-19.

3. Lack of finance 

Amid slow demand and negative market sentiment, banks are reluctant to lend to MSMEs. This is mainly because the sector has a high ratio of non-performing assets (NPAs) or bad loans. As of January, the bad loan ratio of MSMEs was 12.5%. Besides the lack of fresh funding, businesses are struggling to recover existing payments from clients.

Relief Measures Sought by MSMEs‍

Soon after the lockdown announcement, MSMEs sought concessions and relief from the government to tide over the financial crisis. Their demands included:  

• Time from banks to pay loan installments, interest without incurring a penalty and being declared a non-performing asset
• Inclusion in the 15% income tax slab
• 5% interest subvention on working capital   
• Reduction in electricity and water tariffs
• Payment of salaries by the government
• Regular payment of account receivables under the Goods and Services Tax (GST) even if MSMEs have not received payments from customers
• Tax accounting reconciliation, assistance on issuance of credit notes under GST, relaxed tax invoicing in the event of cancellations/reductions in orders
• Change in time of supply without fee change to avoid incorrect GST reporting. Time of supply is the time when goods/services are considered supplied and when GST must be paid   

India’s Covid-19 Response

The government has so far released a Rs 20 lakh crore stimulus package to help individuals and businesses tide over the Covid-19 financial crisis. The Reserve Bank of India (RBI) released the first tranche of relief measures on March 27. Finance Minister Nirmala Sitharaman announced a second tranche on May 13. The following are the main relief measures for MSMEs:

RBI’s relief measures

1. Moratorium on term loan EMIs

The central bank has allowed banks and lending institutions to allow borrowers to defer EMI payments on term loans till August 31. No late fee will be charged and credit scores will remain unchanged. However, interest will be charged on the months EMIs are not paid.     

2. Special Liquidity Facility to Sidbi

The RBI has extended a special refinance facility of Rs 15,000 crore to the Small Industries Development Bank of India (Sidbi) so it can provide liquidity to MSMEs. Soon after, Sidbi announced special liquidity support schemes for small businesses via banks, non-bank financiers and micro finance institutions.

You can read the full list of relief measures in this RBI press release here.

Government’s relief measures

1. Revised definition of MSMEs

The finance minister explained that the definitions were revised because the older and lower thresholds had made business owners wary of expanding, believing that they would lose the benefits they enjoyed as MSMEs if they expanded.               

2. Rs 3 lakh crore credit guarantee

A credit guarantee entitles a business to a loan from a bank or non-banking financial company that will be repaid by the government if left unpaid. Only those businesses with outstanding loans of Rs 25 crore and turnovers under Rs 100 crore are eligible. They can avail a loan of up to 20% of their outstanding credit as on February 29, 2020. The loan has a tenure of four years, with a 12-month moratorium (which means payments will start only after a year). It is collateral-free, does not charge a guarantee fee, and comes with 100% credit guarantee cover. It can be availed up to October 31, 2020. This is expected to benefit 45 lakh enterprises, according to Sitharaman.                 

3. Rs 20,000 crore subordinate debt scheme

This makes loans available to MSMEs that were struggling with loan payments before the Covid-19 crisis. But the government guarantee here is partial. The government expects this measure to help 2 lakh businesses.     

4. Fund of Funds with Rs 50,000-crore corpus

The purpose of this fund is to finance “viable” MSMEs and help them grow. The government’s share in the fund is Rs 10,000 crore and it expects to collect the rest from institutions such as the Life Insurance Corporation of India and the State Bank of India.

Industry Response to Covid-19

In March, the Confederation of Indian Industries (CII) – a non-government, industry-led organisation with 9,100 members drawn from the public and private sectors, including MSMEs – announced measures for MSMEs. These included a CII COVID-19 CODE and a CII COVID Rehabilitation and Relief Fund to help the sector stay in business and avoid laying off workers. The CII also asked member companies to produce sanitizers, ventilators and medicines on a no-profit basis.

What it All Means‍

To what extent did the relief measures help MSMEs? While it might be too early to tell, a survey with a small sample size, conducted by Skoch Consultancy Services in association with the non-profit Federation of Indian Micro and Small & Medium Enterprises in May, provides some clues. Of the 200 respondents, 34% found the government’s stimulus package useful while 44% did not. In addition, 77% said the immediate challenge for MSMEs was to meet fixed expenses such as paying salaries and vendor bills. And, 86% favoured direct cash support. Experts agree. They say the government is increasing the burden on businesses by providing loans instead of upfront liquidity.  

Another survey, conducted by the All India Manufacturers’ Organisation and published in June, found that 35% of MSMEs had gone out of business and that the relief measures had either not reached them or had been inadequate. Of those hopeful of getting back on their feet, 46% said recovery would take three months while 26% said it was only possible by the year-end.

With the situation as it is, unemployment has naturally followed. The number of MSMEs cutting all jobs in May rose to 6% from 4% in April.

Adding to the gloom, India’s overall economic situation remains grim. In June, the International Monetary Fund said India’s GDP would contract by 4.5% in 2020-2021. This was a revision of its April forecast of 1.9% positive growth.