Indian MSMEs Pathway for Post-COVID Revival

Debajit Das, MSME Expert

There is no doubt that COVID-19 will have a large impact on the Indian economy. The recovery of the
underlying economy will be slow, and it will take around 2 years for normalcy to come back across
sectors. The uncertainties in the logistics leads to a cascading effect, transporters struggle to not only
place vehicles for loading, they also are under pressure to adjust their quotes for carrying goods, as
they also face lower attendance, with their operational risks increasing steeply. Due to all these
interruptions, the end user also starts postponing non-essential purchases, and disengages from the
consuming processes, by postponing their demands. The Corona effect has adversely affected the
profitability of the company to the extent of about 30% of its annual profit. Those companies which
have been operating with excellent operational parameters, like, high quality, high productivity, well
trained workmen, well maintained machines, etc., will take off faster than the others. Thus, for well
managed companies, the period after lockdown could be an opportunity, while, for others, it could be
an uphill struggle. During the lockdown period, good companies must develop recovery plans, while
the not so good ones will develop survival plans. Choking of distribution channels due to this effect
are not unknown and goods tend to get offloaded at lower prices, providing volume support, but
hitting the profit and profitability.

Both the service sector and manufacturing sector has been equally hit but the manufacturing is most
hit due to the physical presence requirement in the plants and service industry to some extent has
been able to be operational by way of provisioning in terms remote work place. As such our focus
would be more on manufacturing sector. Manufacturing industry which contributes almost 20% of
the GDP has been hit in many ways due to the Corona effect. Of this, 50% is contributed by the auto
industry. Even prior to the lockdown, the auto industry was not in a great shape, with sales down by
more than 15% and production cuts of the order of 5 to 10% or more. In the unorganised industry,
the situation was much worse, as the uncertainty would impact smaller organisations with lesser
retentive power, due to their lower profitability.

Future with COVID is evolving but it has already put its footprint in the Indian economy. COVID19 will
remain around and create a high degree of uncertainty in all aspects of the business, in particular, in
avoiding further spread of COVID19 in the workplace or through the movement of people and
materials, which may result in further restrictions and potential return to lock-down. The market is
very tight and extremely cash constrained. This is largely due to extreme uncertainties with regard to
demand for MSME’s products and resulting low or non-existing business income, whilst expenses are
being incurred for labour, energy, rent and other business inputs. Manpower is a constraint, with
MSMEs indicating that 30 to 70% of their pre-COVID workforce might have migrated back to their
home towns because of uncertainties and loss of income due to lock-down. It will be a challenge to
convince staff to return (or return in time) or acquire new staff, and the staff changeover is expected
to impact negatively on productivity, quality and defect rates, adding further to financial concerns.
Machinery and stocks of raw materials, work-in-progress and final product have degraded. MSMEs
will need to undertake outstanding maintenance and service and clean-out wasted stocks, before they
can resume operations, at a significant cost and with likely write offs to stocks currently trapped on-
site. Ensuring timely supplies of essential inputs without price hikes, is of concern. Particularly those
MSMEs that are critically dependent on specialized parts from other states or internationally express
concern on their vulnerability to supply shortages.
Technology for many businesses, until today, was considered to be a support function with it being
used as a means to get to an end. This is set to change as technology will now become the frontline
requirement in most organizations. Its importance will be comparable to that of revenue-generating
functions – sales and business development. Automation will gain momentum as the spend on
sophisticated IT infrastructure outpaces human resources. Job creation will be limited with more
offers being rolled out on a contractual basis than on a full-time basis. This sort of gig economy will
emerge in the emerging markets as well as the more developed markets. Work from home will be the
new normal. Firms in some sectors will realise that employees working from home are equally
productive as compared to when they are working from the office. This will also help in saving
infrastructure costs. Data and IT security will become even more important for businesses. Traditional
businesses, including heavy industries, will find it difficult to survive without access to information
that would help with optimization and extracting efficiency. United Nations Industrial Development
Organisation has recommended the following few important steps for revival of businesses from the
COVID situation:

Review the impacts of lock down on critical assets, review likely

Plan for Recovery scenarios, prioritize business operations and set ‘back into business’
targets
Ready the Workplace Make your workplace safe through vigorous Infection Prevention and
Control at workplace, through social distancing, improved work and
people flow and better hygiene
Restart to Recover Restart and debottleneck earlier business operations and supply chains,
serving lead buyers first
Revive for Growth Pivot new business employing core competencies and critical assets
with new products, services and/or markets
Future Proof Create capacity in your business to respond and recover from adverse
events

Critical elements of business which needs to be carefully analysed while planning to reopen
businesses are:

Entrepreneurship Further develop entrepreneurship skills to succeed in changing business

and societal environment
Customers Engage with customers and work towards making your business part of
their success
Supply Chain Understand supply chain and strengthen partnerships for critical
supplies
Operations Strive for manufacturing excellence, through lean manufacturing,
resource efficiency and quality management
Manpower Create culture of productivity and quality and provide decent
conditions of work and employment
Finances Sure-up cash flows to focus spending on things that matter for your
business
Occupational Health Maintain healthy and productive workforce and minimize risks to
& Safety business
J. Sustainable Demonstrate enhanced commitment towards sustainable production
Production taking care of environment, energy and climate change
Increase in revenues is possible in cases where pent up sales will materialise, provided, companies are
able to supply goods. Clearly, those companies which have kept their supply chain pipelines active,
will benefit, and they can recover some of their sales. This will also be affected by how the competition
is gearing up, and, hence, excellent companies can use this opportunity. New products strategy: This
is a direct outcome of the Corona effect, which will last for at least one more year, if not more. Certain
goods, especially related to healthcare, are likely to show high demand, and this could lead to a
cascading effect, through stimulating demand in related products, and a psychological effect which
leads to a general demand pick-up. While the overall economy might take a hit because of the
government lockdown, some sectors are set to see immense growth in the post-COVID era – FMCG,
B2C specialised lenders, gold-dependent companies, food retail and pharmaceutical companies to
name a few.

Weeks after the government began providing relaxation to reopen business activity, most MSMEs
have not been able to restart because of supply issues and labour availability. A major part of the
industry is staring at job losses as companies have been cash-strapped for two months now. In the
above scenario, Industries had three major demands from the government – meeting salaries and
interest payments during the lockdown period, and easy access to loans, so they had cash to restart.
Last week, finance minister unveiled a slew of measures for MSMEs as part of the economic package
to counter Covid-19 outbreak, which included ₹3 lakh crore collateral-free automatic loans for small
businesses and two separate funds to provide equity support. As part of one of the long-pending
reforms in the sector, the government also changed the definition of MSMEs, linking it to turnover
limits so that such businesses can grow without losing benefits. The ₹3 lakh crore worth of loans can
be availed by existing borrowers with up to ₹25 crore outstanding, and ₹100 crore turnover. The fresh
loan amount can be up to 20% of a company’s outstanding. Many small businesses are wary of
taking fresh loans even if they are backed by government guarantee, as they are not sure how much
demand will be there for their products when they resume business activity. Micro, small and medium
enterprises (MSMEs) expected a direct relief from the government in terms of waiving of electricity
bills, payment of salaries, among others that would have helped them stay afloat. Industries
aspirations is to have a direct benefit transfer (DBT) support to help them face the crisis better.
Industries expresses that It does not make sense for us to take fresh loans, since new contracts are
not being awarded for the past two months. Moreover, the existing term loans like cash credit limits
have been reduced by bank, which is looked upon as a setback for MSMEs.

With the country still under lockdown and suppliers and dealers only partially open, manufacturing
firms that were allowed to resume operations are finding the going tougher than expected. Auto,
steel, cement, component makers and engineering companies are struggling to streamline
production, with output barely touching 20% of capacity since production started with the gradual
lifting of curbs imposed to combat the spread of Covid-19. Work at factories has resumed in tough
conditions: Demand is yet to revive, labour availability is limited and new safety and health norms
have to be enforced in the workplace. In addition, many industry hubs in red zones, which have the
most restrictions, remain closed.

The lock down has impacted businesses in many aspects. Production and sales have slowed or even
halted. Demand for products or services may have dropped, your inventories may not be needed in
the same way, supplies may not reach your premises and some workers and staff may have left. There
is a lot of uncertainty how COVID19 pandemic will unfold and what restrictions and incentives will
apply. It is worth to reflect and plan so that you can focus your efforts on those business activities that
are most likely to generate immediate business and cash flow. With a smart approach and planning
definitely mankind will be able to overcome this disaster not only in the globe but also in India too.
We only need to be careful and move with cautious but at the same time think progressive and
innovative to survive and succeed.