Focus: GS-III Indian Economy
Why in news?
- Small businesses have been hit the most by the spread of covid-19, data from CARE Ratings confirms.
- Listed companies with sales of less than Rs. 25 crore recorded the sharpest contraction in sales of around 67% from April to June 2020.
Why have small firms been hit the most?
- Many small businesses, especially in the listed space, are part of supply chains that feed into bigger companies.
- Due to regulatory restrictions and the lack of a clear distinction between what is essential and what is not, many supply chains broke down, resulting in a fall in production and hence, lower net sales for small businesses, with a size of less than Rs. 100 crores.
- Many small companies employ contract labour. Due to the spread of covid-19 and the lockdown, people working on a contractual basis either chose to or were forced to move away from the country’s key manufacturing hubs back to their homes, in the eastern part of the country. This impacted production of small businesses.
- Also, many small firms feed into big companies. As the demand for products made by bigger companies collapsed, they cancelled orders, leading to a drop-in sales for small businesses.
Is the business model of small firms at fault?
- Unlike many large companies, which make final products for sale to the end-consumer, smaller businesses are more into making intermediate products that go into the making of final products.
- Hence, smaller businesses tend to typically depend more on orders from a few large companies, in comparison to larger businesses that are significantly more diversified. Given this, in any economic crisis, they are likely to get hit more.