The impact of the COVID-19 pandemic on Indian MSMEs due to various factors

The MSME sector is one of the most vulnerable sectors of India. Learn how the COVID-19 pandemic impacted businesses and how they are overcoming it.

SMEs are one of the main drivers of India's economic growth. The SME sector, which includes the service industry, packaging, infrastructure, manufacturing, food processing, information technology, and chemicals, has proven to be the most dynamic driver of growth in the Indian economy during the last two decades.

In recent years, the MSMEs sector has outpaced the industrial sector in terms of growth. This industry offers jobs and helps maintain regional balance by bringing industrialisation to the remote rural and backward areas. According to data given by the MSME Ministry on 16 May 2021, India has roughly 6.3 crore MSMEs, which contribute approximately 29% of the country's GDP through national and international commerce. Nearly half of the country's exports come through this sector.

According to the 73rd round (2015--16) national sample survey, the MSME sector provided almost 11.10 crore jobs, with nearly 3.6 crore in manufacturing, 3.9 crore in commerce, and 3.7 crore in other services. Given all of these facts and data, it is clear that for India to achieve its goal of becoming a $5 trillion economy by 2025, the expansion of SMEs is critical.

The Impact of COVID-19 Pandemic on the MSMEs Sector

Due to its size, scope of activity, and financial resources, the MSMEs sector was the most vulnerable during the COVID-19 pandemic. According to studies and surveys, the national lockdown implemented in April 2020 had a detrimental impact on nearly 95% of businesses.

About 70% of businesses were disrupted till August 2020, as well as after the February 2021 progressive unlocking. During the lockdown imposed in 2021, about 11% decline in business volume of Indian MSMEs has been registered as compared to 46% decline during the nationwide lockdown in the year 2020.

The three critical barriers that the MSMEs faced are market access, overall productivity, and getting access to more finances.

Between March and May 2020, the export sector's clothing manufacturing units suffered a loss of nearly Rs. 150 crore.  Loss of India's leather industries has been estimated to be Rs. 11,210 crore in the global market. The All India Manufacturers Organisation surveyed MSMEs and confirmed that the self-employed MSME units, predominantly 35% of MSMEs sector, don't have any recovery scope for their businesses and have already begun winding up their units.

Related: Post-COVID-19 consumer habits are changing has your business kept pace

Factors Responsible for Vulnerability of MSMEs

• The Crunch of Capital

In India, SMEs have a capital shortage that is largely disorganised. The majority of their transactions are in cash and are not properly recorded in accounting books. Due to a lack of exact transaction data, these businesses do not receive the required credit score and find it difficult to obtain official business loans.

• High Transaction Costs

MSMEs' business volumes remained modest in most cases, resulting in high transaction costs, both in offline and online payment modalities. In the medium to long term, this has a substantial impact on the company's profit margin.

• Risk Perceptions by Financial Institutions and Banks

In the absence of good credit scores or collateral, most banks regard MSMEs as risky customers. This problem is amplified when the customer is a startup. Even if the banks are convinced to give the loan, the interest rate will be higher than usual. Depending on the size of the firm, cash flow pattern, and vendor engagements, many MSMEs have varying financial requirements. All of this necessitates customised services and goods.

• Cybercrime

In the absence of proper awareness and understanding about managing digital banking and transaction activities, SMEs appear to be more exposed to cybercrime and phishing.

MSME Post-COVID-19 Scenario

The government has come out with support programmes such as the emergency credit line guarantee plan, repo-rate reduction, e-market linkages, and PF and EPF support to help the MSME sector. Aside from that, the government launched its e-marketplace (GeM) to assist enterprises in product development, work efficiency, and cost reduction.

All of these approaches have yielded positive results. Sales in the MSME sector have just surpassed 88% of pre-pandemic levels, with businesses like grocery stores and restaurants regaining their footing following a 2-year decline.

Finally, numerous surveys have revealed that over 50% of entrepreneurs are confident about business recovery after the economic slowdown due to the pandemic.

Wrapping up

With things gradually returning to normal, the MSME sector will definitely rebound back and achieve new heights than even the COVID-19 pre-pandemic levels.

Many businesses are fighting for a consumer's share of wallets. According to the the poll, 49% of Indian MSMEs plan to invest in technology to offer a better customer experience.

More and more Indian MSMEs embrace digital. Investment for the digital journey has become a top priority. Nearly 98% of the surveyed businesses have expressed a keen interest in investing in more payment options.