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In Pandemic Shock, Critical Lessons for MSMEs

Context

Apart from government policies that help the MSMEs recover, financial safety nets must be created for MSMEs to help them face economic shocks and be more resilient.

Relevance

GS-III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Dimensions of the Article

  • Present Scenario for MSMEs
  • Impact of the Pandemic
  • Lessons for Resilience
  • Planning Ahead
  • Way Forward

Present Scenario for MSMEs

  • Micro, Small and Medium Enterprises (MSMEs) are critical for achieving the overall objectives of economic development.
  • The sector is a significant contributor in terms of industrial output, employment generation, and the share in gross domestic product and export. 
  • despite many initiatives by governments since Independence, the sector has been facing challenges in its quest for survival and growth. 
  • COVID-19 pandemic has further exposed the vulnerability of the MSME sector. 

Impact of the Pandemic

A recent study has observed that:

  • The turnover of around 90% of small firms had declined in FY2020-21.
  • Around 53% of firms faced more than a 50% decline in their turnover.
  • Around 29% of firms reported a collapse of their businesses.
  • Around 53% observed a decrease in demand while around 36% faced erratic supply of raw materials.

The main reasons for a fall in turnover included:

  • Restrictions on economic activities and mobilities
  • Decrease in demand
  • Shortage of raw materials
  • Restriction on trade
  • Slow recovery of markets
  • Payment delays and labour shortages
  • These firms faced a 25% reduction in their employment particularly in the informal workers’ segment that stood at around 47%.

Major challenges faced by firms in their revival included:

  • Delayed payment issues
  • Reduced demand
  • Lack of financial resources
  • Supply chain disruption
  • Increased cost of production
  • Lack of skilled workers
  • Business uncertainties have prevented them from availing financial assistance under ‘Atmanirbhar Bharat’ Package

Lessons for Resilience

  • Not all firms have suffered due to the pandemic-induced recession.
  • Around 10% of firms had either seen a rise in their turnover or reported no change.
  • The key sectors these firms operated in included human health activities; manufacture of pharmaceuticals, medicinal, chemical and botanical products; food and beverage service activities; and manufacture of apparels, etc.
  • They quickly adapted to the use of e-commerce platforms and even switched to other business activities that had demand.
  • Used their own savings to invest in the areas that offered new opportunities.
  • Highlights that a firm’s resilience depends upon its financial resources and ability to invest in new technologies or new business opportunities.
  • The firms that suffered lacked financial planning for business uncertainties in order to overcome vulnerable shocks.

Planning Ahead

  • Apart from the pandemic, there were also other factors such as a sudden change in government policies, wars, and natural catastrophes such as floods and drought, etc. which affected small businesses.
  • Further, the bulk of MSMEs are in the informal sector which lack registration and the necessary financial documents to avail such benefits.
  • These firms are at great risk of shutting down after a large-scale disaster or economic shock.
  • Therefore, there is a need to develop a mechanism for MSMEs for increasing their resilience to economic shocks and business uncertainties.
  • Government can initiate what is called an ‘Uncertainty Corpus Fund for Small Businesses’.
  • This fund can be used to meet the financial needs of small firms during business uncertainties.
  • It may be linked with the turnover of firms — a firm could maintain a certain fraction of its turnover to meet the needs of this fund.
  • The Government should encourage small firms by assuring them a lucrative return on the investment through this fund.
  • Further, the Government may also contribute to the corpus fund as a fraction of the contribution of MSMEs for firms up to a certain limit of turnover.
  • Another measure can be the ‘Small Business Insurance Scheme’ which can be similar to term insurance.
  • MSMEs in the country can be a huge market potential for the insurance sector, if such a scheme is framed properly.
  • Government may pay an initial premium or a fraction of the premium on behalf of such enterprises particularly micro enterprises and own account enterprises to encourage such schemes.

Way Forward

Although Budget 2022-23 seeks to lay a foundation and a blueprint to steer the economy over the (Amrit Kaal) next 25 years, it has failed to bring in any plan/ideas that makes the MSME sector resilient. Suggested changes can be adopted to ensure resilience of MSMEs and create a conducive environment for business with scope of management of crises which may arise in future.

Source – The Hindu

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October 2022
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