…Without Government Relief.
The dilemma of protecting lives when lives depend on livelihoods — Will the Lockdown impact be the trigger that implodes the struggling SMEs in India?
This article examines whether the Indian SME sector would survive the disruption caused by the Covid 19 lockdown. Already struggling, Indian SMEs are faced with a Perfect Storm of converging trends. The government needs to step in to save the sector. SMEs too should learn to be resilient now.
Nearly 1 crore 70 lac SMEs are in danger of complete shutdown in the months after the lockdown.
As Indians near the end of the more than a month-long lockdown due to the Novel Coronavirus or Covid-19, it is time for India Inc. to take stock of what the impact of the lockdown has been and what would be the recovery from it.
Doubtless, prioritizing saving lives over protecting livelihoods is a humane approach. However, when the lives of millions of Indian workers are dependent on their livelihoods, the pressure on the Indian governments (state and central) is immense as far as reopening the economy is concerned.
Already, Karnataka has announced that it would allow industrial activities outside the containment zones to resume operations from May 4th. Now, the ball is in the central government’s court for restarting the other sectors.
How Bad is the Situation in the SME Sector?
While India Inc. struggles to get back on its feet, the fate of the SME or the Small and Medium Enterprises sector is uncertain, coming on the back of an already struggling economy even before the lockdown. Indeed, it is by now clear that Covid 19 came as a “bolt from the blue” that struck the already comatose SMEs.
LocalCircles Survey of Indian SME Startups. Image Credits: Entrackr
For instance, Industry associations of India expect nearly a quarter of the estimated 69 Million SMEs in the country to shut down post the lockdown and many of the rest barely surviving and scraping through the impact.
It needs to be noted that absent a generous fiscal and monetary package targeted specifically at the SMEs, it is highly likely that many of them would simply wither away.
A Perfect Storm of Converging Trends Hit the Indian SMEs
The reasons for the present state of the SMEs in India are manifold. The lockdown has exacerbated them leading to a perfect storm of converging trends impacting the sector.
For instance, the Indian economy even before the lockdown was barely growing at 4-5%. The advance estimates indicate that it would contract or barely grow between 1-2%. Indeed, many economists are expecting contraction as the norm rather than the exception.
Moreover, there seems to be a consensus that even after the lockdown is lifted, the weaknesses of the SMEs would need a really strong “hand of the state” to pull them from the morass.
India’s Lehmann Moment, Drying up of Liquidity, and Shrinking Exports
SMEs need working capital to survive and with banks and shadow banking institutions being hesitant to provide advances in the wake of India’s “Lehmann Moment” in September 2018, it is anybody’s guess as to how the future would be. Along with working capital, SMEs which rely heavily on migrant workers, most of whom have gone back to their hometowns is another blow to the fledgling industries.
In addition, they also depend on export markets that were anyway down thanks to the global slowdown. Furthermore, with deglobalization being the mantra with protectionist policies, a collapse of global supply chains happened at the same time leading to further pain.
Is There Hope for Indian SMEs
So, is it that the Indian SME sector is on the brink of collapse? The short answer to this might seem yes, though a careful “reading of the tea leaves” gives scope for optimism.
For instance, both small and medium exporters in export markets that are usually dominated by China can benefit from the vacuum as China returns to work amidst fears of a second wave of infections.
Moreover, India SMEs can benefit from Western firms moving out of China to both reduce dependence on a country that is viewed negatively post Covid-19 and to diversify risks arising out of “putting all eggs in one basket”.
How ‘Make in India’ can make India great with the strong ‘Hand of the State’
This is where the Indian Government has a role to play as it can use its Make in India policy to provide monetary and nonmonetary assistance to the SMEs to partner Western firms wishing to enter India.
Moreover, the government can also waive off rents, utility charges, and extend the moratorium on loans taken by the SMEs. There is also a demand by many enterprises that the government foot 70% of the wage bill for the next three months to ensure that they “get back on their feet”.
Watch: India’s SMEs urge the government for help with funds
Crisis Resilience and Bouncing Back
Last, the disruption caused by Covid-19 should serve as a wakeup call to India Inc. to be more resilient. Also, they need to be less dependent on Jugaad. It is high time Indian firms learned to create buffers and ring-fence their operations from such shocks by formalizing their businesses.
As we move to the new normal and recover from the impact of the lockdown, SMEs in India need to remember that the Chinese word for crisis contains both danger and opportunity. Now, there is a silver lining.