SME recovery after the COVID-19 crisis

26-November-2020 by Virtue Ventures

As the novel coronavirus, Covid-19, quickly spreading over the world, health services in many nations is increasingly overwhelmed, while the global economy is falling into a phenomenal downturn. India’s vast small and medium enterprise is moving towards business recovery to pre-covid levels.

In May 2020, the Indian government reported a sum of INR 20.0 lakh Crores as Atma Nirbhar package including a large number of declarations to help the SME sector, including the provisions of emergency working capital, creating a dedicated fund with INR 10,000.0 Crores corpus, among other measures. Executing these won't be a simple and monetary guide to micro small and medium enterprises that would not be viably dispersed as a result of difficulties with targeting those most in need.

The COVID-19 pandemic has sent shockwaves through the business community and forced many micro and medium businesses to either cut back their operations or stop them altogether.

In many ways, the coronavirus has influenced the economy, especially to the smaller businesses, on both the supply and demand sides. On the supply aspects, firms experience a decrease in the supply of labor. Measures to contain the diseases by lockdowns and quarantines cause additional and more severe drops in capacity utilization. Moreover, supply chains are interrupted resulting in shortages of parts and intermediate merchandise. On the demand side, a dramatic and unforeseen loss of demand and revenue for SMEs severely affects their ability to function and causes severe liquidity shortages.

Furthermore, consumers experience loss of income, fear of infection and heightened uncertainty, which in turn reduces expenditure and consumption. These effects are intensified because employees are laid off and firms aren't ready to pay salaries. Some sectors, such as tourism and transportation, are notably affected, also contributing to reduced business and consumer confidence. More generally, SMEs are likely to be more vulnerable to ‘social distancing’ than other big enterprises.

According to a survey by the Global Alliance for Mass Entrepreneurship, 81% of micro-enterprises polled are confident of a recovery post-COVID-19 whereas 57% reported not having any cash reserves to survive.

There are also getting mixed suggestion regarding whether the recovery will be V shaped, meaning a fast recovery, U-shaped, inferring stagnation before development, or W-shaped, a droop after an underlying time of development. At this stage, a U-shaped recovery looks in all likelihood, given the fact that the manufacturing sector is still in the depression.

Regardless of unemployment data now pegged at just marginally higher than the pre-lockdown levels, only 30 per cent of the business is reported to have touched even 70 percent capacity. Clearly, the road to growth will be slow and painful in the next two years. Unless the SME sector is rescued in a genuine way, recovery year onwards from now will be a pale shadow of desire.

As for converting these green shoots into sustained recovery, there are a couple of things the government needs to do right away. Firstly, it needs to provide greater comfort to micro and small enterprises that are hit by the pandemic. The recent package announced to the micro, small and medium enterprises (MSME) has merely given a relief to these companies; most of them haven’t even taken loans and thus fail to qualify for the concessions. The Finance Ministry needs to investigate the manner by which small businesses operate and provide assistance rather than implement a mechanical policy of refreshing bank loans. It is the ideal opportunity for the government to implement measures to provide short-term support in an offer to ensure that recovery takes place in the near future.

Secondly, it needs to give considerable funds through the direct benefit transfer to the poorest of the poor. The choice to lengthen free foodgrains right up to Diwali is welcome but must go along with cash transfers to support those who have lost livelihoods as a result of the lockdown. This may bring on about the much-needed demand stimulus for the economy. It is the ideal opportunity for the government to implement measures to produce short-run support in an offer to ensure that recovery takes place sooner instead of later.

As India attempt to bring its economy back to normal, the pandemic continues to rage with uncompromising intensity. The way toward the unlocking has been a long way from smooth. All things considered, there are hints of sunshine at the top of the proverbial tunnel. A few green shoots of recovery are visible, though much more support is required to convert them into a full-fledged economic revival. The biggest good point is the rural segment, where record rabi output and procurement are expected to spur demand. Thus, agricultural growth, combined with rising rural demand, is probably to be the reason for a recovery process during the rest of the current fiscal.

The rabi foodgrain output for the year is calculable at a record level of 149 million tonnes contrasted with 139 million tonnes a year ago. Likewise, plentiful rain in June and the forecast of a normal monsoon have boosted expectations of a similarly good Kharif crop. Tractor sales have up by 4 percent contrasted with a year ago, while even two-wheeler and passenger car sales are surging in rural areas in comparison to the urban area. These indications of a pick-up in rural demand hint of relief in the coming months for the industry.

Another key indicator of recovery is rising GST (Goods and Services Tax) collections and Electronic bills that are inching back to pre-Covid levels. This can be an important factor for both the Central and state governments looking for revenues to fill exchequers confronting exhaustion since the time the lockdown started in March end this year. GST collections in June have bounced back to Rs 90,917 crore from a record low of Rs 32,394 crore in April. It might represent 9 percent lower than a year ago, however, it indicates the business is getting back on track. Electronic bills reflecting goods movement has also risen significantly in June, although don't seem to be nevertheless at January levels.

Trade data, on the opposite hand, present a blended picture with the country likely to have its 1st monthly trade surplus in June after 18 years. It reflects weaken imports due to a slowdown in economic activity also as lower crude oil prices. On the splendid side, exports are presently around 90 percent of pre-Covid levels. However, bringing exports back to pre-Covid pandemic levels aren’t sufficient at the present time.