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
