In pandemic shock, critical lessons for MSMEs

Context: MSMEs (Micro, Small and Medium Enterprises) are critical for achieving the overall objectives of economic development. During the pandemic, MSME was the worst hit sector. The sector is still struggling.

MSMEs are a significant contributor in terms of industrial output, employment generation, and exports. This sector is trying to recover from the effects of the pandemic.

Findings of the survey

A primary survey of 225 small firms in the National Capital Region (NCR) and Uttarakhand made the following observations:

• 90% of small firms faced a decline in their turnover in FY2020-21
• 53% of firms faced more than a 50% decline in their turnover.
• Around 29% of firms reported a collapse of their businesses

Following are the reasons behind the decline in growth:

Covid Induced reasons:

1) Restriction/s on economic activities and mobilities; 2) decrease in demand; 3) shortage of raw materials; 4) slow recovery of markets; 5) payment delays, lack of financial resources and labour shortage 6) increased cost of production; 7) lack of skilled workers 8) ‘Atmanirbhar Bharat’ package was not helpful due to lack of demand and business uncertainties. Thus, firms did not use financial assistance available under the program.

Other reasons:

1) Sudden change in government policies, 2) natural catastrophes such as floods and drought, 3) bulk of MSMEs are in the informal sector which lack registration and the necessary financial documents to avail finance opportunities.

However, some firms have reported growth as well:

Around 10% of firms under the study had either a rise in their turnover or reported no change. The sectors include human health activities; manufacture of pharmaceuticals; food and beverage service activities; and manufacture of apparels, etc.

The resilience of these firms was the result of; 1.) availability of financial resources, and 2.) ability to invest in new technologies or new business opportunities.

What should be done?

Following measures can help MSMEs in becoming resilient and sustaining their growth during business uncertainties caused by economic shocks.

1.) Setting up Uncertainty Corpus Fund for Small Businesses: On the line of public provident fund, government must make the emergency fund mandatory for the small firms.

A lucrative return on the investment to encourage the firms can be set up.

2.) Small Business Insurance Scheme: The term insurance can be offered to MSMEs on the lines of crop insurance scheme.

Source: This post is created based on the article “In pandemic shock, critical lessons for MSMEs” published in The Hindu on 12^th April 2022.