Second Covid wave hits Indian MSMEs hard

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Second Covid wave hits Indian MSMEs hard

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1. The story: MSMEs are combating lockdown-related issues daily. Stocks are piling up at their godowns, a labour shortage looms, and suppliers are asking for payments to be cleared. Localised lockdowns as part of the second wave of the pandemic, have disrupted the payments cycle critical for small manufacturers.
2. Reducing production: From working 24x7, many first cut production to 6 days (8-hour shifts), then 5 days (8 hours shifts). Now work is done only on alternate days. All big factories MSMEs supply to are shut currently, so finished goods cannot be shipped. MSMEs still have to continue manufacturing to fulfil pending orders and keep the remaining labour busy. Small businesses across the chain are cash strapped.
3. MSMEs crippled: The restrictions have taken a heavy toll on lakhs of small businesses across the nation as they fight for survival on the face of crippling labour shortage, disrupted supply chains, logistic blocks, raw material shortages, serious cash flow problems—plunging demand. Even in states that have allowed industrial activity to continue in lockdowns, major SME clusters like Ludhiana, Kanpur, Madurai, Coimbatore, Cuttack, Tiruchirapalli, Agra and Rajkot, have reported major drop in economic activity as large factories have shut down, or are operating at partial capacity, and local demand has plummeted.
4. An example: Footwear exporters in Agra were gearing up to raise production to meet the autumn and Christmas demand from Europe and US when the state imposed Covid-19 restrictions impacting business activity. In 2020, after the first lockdown, exports shrank by 30 per cent compared to 2019. In 2021, a further 30 per cent dip in exports from 2020 levels is likely. The whole leather ecosystem has been impacted by the second wave very badly.
5. Government suppliers too: While SMEs catering to corporates or local markets struggle, small businesses that supply to government departments are facing a different kind of challenge; a raw material shortage and rising prices has meant that they will end up taking losses while fulfilling contracts at old rates. Steel prices have gone up substantially, so how does one supply finished goods at old rates? MSMEs say the government should extend existing contracts or renegotiate contracts or cancel penalties.
6. ECLGS didn't work out: Since the restrictions started in the month of March, small businesses have also lost out on orders companies and government departments dole out before closing their accounts for the year. The second lockdown has pushed small businesses to the brink as they are unable to fulfil formal banking requirements. For some, the choice is stark—shutter businesses or bear deeper losses. Banks aren't too helpful, although the government announced an Emergency Credit Line Guarantee Scheme (ECLGS) last year, providing funding of up to Rs 3 lakh crore in the form of a fully guaranteed emergency credit line for SMES. The scheme was even expanded to cover 26 distressed sectors and extended to June 30, but still a large number of 45 lakh plus SMEs haven’t been able to take advantage of the scheme, especially the micro and small businesses.
7. Summary: The sudden lockdown in 2020 led to thousands of SMEs shutting shop or looking for exits, especially in sectors like tourism, hospitality, real estate and retail and the industry representatives say the second wave will end up taking a heavy toll as they are not in a financial condition to sustain operations. With revenue shrinking, small and medium businesses still have to bear expenses like employee salaries, ESI and PF payments, electricity charges, interest payments and taxes but the government hasn’t extended any direct help in dealing with such costs.

Read more on - Polity | Economy | Schemes | S&T | Environment

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