Breaking down Covid’s impact on MSMEs: Demand, supply shocks that are determining issues for small firms

A significant proportion of B2C SMEs operates within the casual sector, no matter their location. (Consultant Picture)

• By MH Bala Subrahmanya

SMEs kind one of many main pillars of the Indian economic system is a longtime reality resulting from their immense contribution to employment, nationwide earnings, and exports. Their contribution by way of improvements is hardly measured on the nationwide degree, and subsequently, goes largely unnoticed. The sudden engulfing of the worldwide economic system by Coronavirus jolted the Indian economic system as effectively together with its SMEs. The Covid-19 first wave (FW) and the nationwide lockdown carried out to include it throughout March-Could 2020 gave an unprecedented blow to this vibrant sector. It had in any other case received accustomed to emerge and work constantly underneath constraints/challenges of assorted sorts: crucial being first, accessing finance in the correct amount and on the proper time, second, attracting and retaining certified workforce, and third, penetrating regional, nationwide and worldwide markets. The emergence of the Covid-19 Second wave (SW) is equally sudden, for which the sector is ill-prepared, because it has hardly recovered from the blow obtained from the primary wave.

The second wave of Covid-19 is more likely to make a devastating affect on the SME sector in India, which has turn into fragile as a result of onslaught of Covid-19 FW. That is so regardless of its recognized deserves reminiscent of flexibility, adaptability, easy organizational construction, efficient inner communication between proprietor and workers, and so on. Nevertheless, nationwide and cross-country knowledge counsel that relative to massive corporations, SMEs have decrease productiveness and wage ranges, extra usually comprising out of date know-how and unskilled or semi-skilled labour, and subsequently extra weak to produce and demand shocks. Covid-19 FW and SW each have, exactly, generated provide in addition to demand shocks to SMEs. An outline of those shocks is suitable to grasp the complexity of the issues encountered by Indian SMEs.

As a prelude, you will need to perceive the character/construction of SMEs in India, by way of their end-market relationship. A significant proportion of SMEs serves B2C markets adopted by B2B markets, and a minority accounts for a mix of each B2C and B2B markets. Basically, B2C SMEs are extra fragile, usually cash-starved, comprise out of date know-how with unskilled/semi-skilled labour, dispersed throughout the nation, in metros, cities, cities, and villages. They invariably make use of native assets, native abilities and meet native wants. Quite the opposite, B2B SMEs are both metro/city-based or positioned round massive corporations, usually supported by the latter (by way of markets, finance, know-how/technical inputs, and even human assets). Subsequently, they’re higher outfitted with know-how, expert labour, and comparatively established markets. The B2C cum B2B SMEs usually fall within the second class. A significant proportion of B2C SMEs operates within the casual sector, no matter their location. In rural India, they’re largely own-account enterprises (family enterprises).

You will need to observe that solely the Financial Census of our nation throws gentle on the magnitude of own-account enterprises (by way of the variety of enterprises and employment). Subsequently, assessing the affect of Covid-19 on SMEs is finished both by ignoring this phase altogether or based mostly on a guesswork. After all, we shouldn’t have any periodical knowledge gathering train even for bigger/formal/registered SMEs (excluding SSI/MSME Census, the newest one was executed in 2005/06). Given this, the one choice for an evaluation of the affect of Covid-19 is subject surveys or interviews. Nevertheless, it’s doable to gauge the probably affect if one can perceive the doable provide and demand shocks that emerge from the Covid-19 disaster.

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Provide shocks are exhibited as follows: (i) Full stoppage of manufacturing as a result of nationwide lockdown (throughout Covid-19 FW) and regional lockdowns (throughout Covid-19 SW), (ii) subsequent affect resulting from a disruption of the availability chain (of inputs and outputs), regionally, regionally, nationally and internationally, (throughout Covid-19 FW) and partial affect (resulting from Covid-19 SW), (iii) mass motion of labour from metros and cities to cities and villages (throughout Covid-19 FW) and partial motion (throughout Covid-19 SW), and (iv) diminished monetary movement within the casual cash market, thereby adversely affecting the operations and output of casual/unregistered SMEs. In consequence, Covid-19 FW would have severely curtailed the output rising from the SME sector (which account for about 1/3 of the GDP), which was mirrored within the sharp destructive progress of Indian GDP (in accordance with estimates, GDP would have contracted by about 20 per cent within the first quarter of 2020/21). The affect of Covid-19 SW is more likely to be extra devastating, regardless of the absence of nationwide lockdown and state governments coping with solely partial lockdowns in most affected areas (that are extra developed areas/states of the nation comprising metros reminiscent of NCR Delhi, Mumbai, and Bengaluru).

Demand shocks are within the type of (i) severely curtailed client demand, which might straight have an effect on B2C SMEs (significantly in client items industries, companies reminiscent of tourism, accommodations, roadside eateries, outlets, cell cart outlets, small transport operators, and so on.), (ii) curtailed business demand, which might have an effect on subcontractors (B2B SMEs – intermediate product producers), (iii) curtailed export demand, which might have an effect on each B2C and B2B SMEs. Nevertheless, solely a negligible share of Indian SMEs operates within the export market and subsequently disruption within the world worth chains of MNCs could circuitously hamper Indian SMEs to any appreciable extent.

When provide and demand shocks emerge concurrently and repeatedly, the wounded and already weak sector will diminish in dimension sharply, thereby affecting employment, earnings, and even exports. “Inflicting wounds on the already wounded entities will convey down morale and motivation to carry out”. General, the brunt of lockdowns, nationwide or regional, can be borne by the formal/registered SMEs and casual/unregistered SMEs, that are primarily confined to metros and cities. The SMEs positioned in cities and villages will bear the brunt resulting from a decline in casual finance availability. However a few of the own-account enterprises (that are primarily meant for assembly native demand, by making use of native assets and native abilities) could survive and a few (self-financed) could even escape the brunt altogether. Given this, policymakers must strategize their disbursal of fiscal and financial stimulus accordingly.

M H Bala Subrahmanya is a Professor, Division of Administration Research on the Indian Institute of Science, Bangalore. Views expressed are the writer’s personal.