- Lockdown has put MSMEs in no cash-flow situation, so much so that payout to employees is a major challenge
- Guidelines for MSMEs to resume operations during lockdown are cost-intensive and unmanageable
- Without opening markets and forward and backward linkages for MSMEs, resumption in operation will be disoriented
The battle between saving only lives or saving both lives and livelihoods continues to rage. The extended lockdown in India has most definitely saved lives; India needs to reopen the economy in a proper measured manner to ensure that the humanitarian loss due to livelihoods does not unravel cruelly. The fear psychosis has to go and there have to be much more open discussions on how to reopen, what to reopen, what safeguards to keep, and how to move out from this compulsorily induced slumber or else it can become a permanent sleepover.
The phoenix may never rise again is a situation we all need to contain. Necessarily, there will have to be handholding for Indian businesses, without having them constantly looking over their shoulders for constant policing and punitive measures, for matters that are and will be beyond their control when they reopen.
MSMEs are one of the critical sectors that will still not know when they will be allowed to open, there will be some even when they are allowed to open, will not know whether they should and if yes, how. This article attempts to assess the dilemma faced by the MSMEs currently.
The MSMEs Dilemma
MSMEs play a significant role in economic growth owing to their contribution to production and employment. Any sector be it agriculture, manufacturing, or services, SMEs are there and everywhere. Statistics show that SME accounts for 45% of industrial output and 40% of the total exports in India.
MSMEs generate employment for 60 million people and creates 1.3 million jobs every year. Given that a majority of India’s population lives in villages and Tier-1/Tier 2 cities, the SME sector has also emerged as a key factor to urbanize rural India.
However, in spite of its contribution to the socio-economic growth of India, SMEs face a number of challenges. The challenges that have been amplified by the COVID-19 are high employment generation means that the MSMEs are labour intensive. The contribution per person is very low, leaving a very minimal margin of safety. This margin may now be largely in negative territory for majority of the MSMEs.
Severe competition from un-organised and non-compliant manufacturers to the organised MSME sector. So, the major concern is how to restart and then manage operations in this lockdown? There are multiple issues being faced in reviving operations, finance scarcity is the result of the lockdown and not the cause thereof, it is definitely the cure though.
A few points for driving this point through are Lockdown costs – Salary payments to workers and staff for the lockdown period are just out of reach as no sales revenue has been generated. There are other fixed costs that will have to be borne, too. Who funds these?
Guidelines for restart and operations have been issued by government agencies/departments. Rightfully strict norms have to be complied with to restrict any spread of the virus such as managing shift breaks, sanitization of the premises for safe working, transportation restrictions, number of employees per shift, etc. All these will mean higher costs that the MSMEs will not be having the cash flow for. Secondly, the costs will not be absorbable in the finished product pricing.
There will be no MSME which will be vertically integrated into the entire value chain. So, the whole supply chain has to be fully operational, the pandemic solution of social distancing cannot work to resolve the #bizdemic issues being faced by MSMEs. The linkages have to be re-established by cleaning the rust that may have accumulated over the lockdown period, re-oiling the same, and trial runs before the linkages will become fully operational.
Some example of the linkages:
Vendors of basic raw materials and ancillary materials plus services – if any one of the components of this is not available, commencing production will be meaningless and sub-optimal.
Availability of workforce – Will they be available? Will the entire workforce be available? Will their cost of personal travel to work location be affordable to them or the employers will have to absorb the same? Who will bear the cost of implementing new norms of providing accommodation, food, and transportation, etc.?
Opening of all markets – if the market space to which the MSME caters to is not opened, production will only lead to the accumulation of finished goods inventory.
Access to markets – there has to be free access to the markets, as unless that is also fully running and live, like the transport systems, the highways, the warehousing facilities, etc, etc., the inventory will again pile up. For instance, transportation is the key issue from receiving raw materials to selling the finished goods.
Market demand revival – most MSMEs cater to regional and local markets by direct sales. First, these market areas have to be open, and secondly, travel restrictions, and fear psychosis of the sales staff and customers’ staff needs to be addressed.
Cash flows problem compounded – most MSMEs operate on very thin margins and the lockdown means additional costs, blocked debtors, inventory pile up, and so on and so forth. Even if the banking system may increase lending, how will they absorb the extra interest costs? These are moot questions that need to be debated along with the other costs, some are listed above.
There will be many “on the brink” businesses that would have been unable to borrow. Many would have not borrowed at all or borrowed less due to prudence. They will need to be reached out, too. Livelihoods depend on their continuity and sustenance.
Above are some thoughts on the MSMEs dilemma, a classic twist – the “bizdemic hits both ways, if one opens a business, one suffers, if one doesn’t, one still suffers”. This is the MSME dilemma – “to reopen or not to reopen”.
Recall an apocryphal quote ascribed to one the most unique villains’ of the Indian Film Industry “Raabert, is ko Liquid Oxygen mein daal do. Liquid ise jeene nahin dega; Oxygen ise marne nahin dega!” — Ajit.
What is, thus, required are meaningful discussions to understand the MSME issues and resolve their dilemma by advising them when to open with proper fiscal and monetary assistance in a healthy business supportive eco-system.