COVID–19 Lockdown: Will MSMEs Survive in this Crisis?

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The COVID-19 epidemic has hit the world at such a large scale and speed that we have only experienced it so far in movies. The reality, as we are seeing it today, is way more alarming and terrifying than fiction. Also, the effect of the virus is expected to be seen long after the medical science provides a cure or at least a vaccination for COVID-19. As a result, the economic cost which will be incurred due to shutting down the world’s large swathes is going to be exorbitant.

Further, due to COVID- 19, whole of India is also under lockdown to control the outspread of the virus. Although the concept of Social distancing plays a vital role for the slowdown of the epidemic, this also means that people will remain at home, and will not interact at offices, factories, shops, and elsewhere. As a consequence, the economic activity is almost at a halt and is creating a recognizable disruption. Moreover, the same situation is anticipated to continue as no one can predict when everything will get back to normal.

According to a recent study commissioned by the AIMO (All India Manufacturer’s Organisation), at present India has over 75 million MSMEs (Micro, Small and Medium Enterprises) and nearby to a quarter of these firms will face closure if the current lockdown, induced by COVID-19, goes beyond 15 April 2020 while a staggering 43 per cent will shut shop if the panic spreads beyond the period of eight weeks.

Further, according to the AIMO statement, as we all know MSMEs, that are considered as the backbone of our Indian economy and offer employment to more than 114 million people and also contribute to more than 30 per cent of the total GDP (Gross Domestic Product). Also, this is the only sector which has the capability and is expected to contribute $5 trillion in our economy by 2025, is going through the most difficult times in the last three years, because of the COVID- 19.

Furthermore, recently the Finance Ministry and Central Bank declared extensive support towards the MSME sector. But, the MSME (micro, small and medium enterprises) sector clearly stated that they would require more extensive support than what has been declared by the Finance Ministry and Central Bank to tide over the three-week lockdown in the face of COVID- 19 epidemic. These businesses primarily want that the lenders should be issued clear directions about strictly observing a moratorium on the interest payment on loans.

Impact of COVID- 19

As per the 2019 joint report issued by the WHO (World Health Organization) and the World Bank predicts that the impact of such an epidemic will be at 2.2 per cent to 4.8 per cent of the global GDP. Moreover, it is significant to note that this report was issued well before the world got knowledge of COVID-19.

Also, according to Barclays estimates that India’s assertive 21-days lockdown could easily bring the country’s growth rate down to 2.5 per cent from the 4.5 per cent it had previously estimated. But according to the address made to the nation by our Prime Minister, Mr Narendra Modi if this epidemic is not timely controlled, it could easily set us back by decades.

Impact of COVID- 19 on MSMEs

According to Mr Sushil Vyas, Secretary AIMO, more than 60 odd million MSMEs are in real danger due to market issues as there is over 92 per cent drop in the domestic sales as compared to the same time in last year, and over 100 per cent drop in the export sales compared to the same time in last year.

Further, the probable direct and indirect impact of the COVID-19 epidemic on MSMEs (Micro Small and Medium Enterprises) differs as per the individual business and sector, but it is expected for the businesses which are dealing in the ‘high contact’ sectors such as the retail and hospitality sectors, as these sectors will be the most adversely affected.

The COVID- 19 has adversely impacted humans as there is a loss of productivity because of increased sick leave, and moreover, has also impacted business as there a loss to the business of expertise, know-how, and skill where a valued and a skilled employee dies from the virus.

Furthermore, the reduced sales because of fall in demand, whether locally or internationally, could also majorly affect businesses’ capability to make payroll and their bottom-line. Also, the Supply chain disruptions could lead to difficulty in sourcing final products or inputs for the final goods, with the knock-on effects for fulfilling contractual requirements.

Another significant impact has been the sudden increase in the sales in short-run due to the panic buying by consumers. It is significant to note that although the sales are increased in short-run due to panic buying but the same will possibly lead to inventory shortfalls, particularly where the supply chains have been disrupted.

Lastly, for many owners around the world having small businesses, there is the real threat of having to a temporary closure, lay off staff or even completely going out of business.

Suggestions made by Confederation of Indian Industry for MSMEs

The Confederation of Indian Industry (CII) has recently announced about the setting up of a CII COVID Rehabilitation and Relief Fund (CRR) in order to help small scale enterprises or MSME in rehabilitation. Further, this decision was taken by the CII Forum on COVID-19, which is the only industry response measures taken towards the Coronavirus epidemic.

According to the Chairman of CII National Council on MSME, Mr Shreekant Somany, after the extensive discussions with the MSME members across the nation, specific measures have been suggested and advised by the CII (Confederation of Indian Industry) to limit the impact of COVID- 19 on the MSME (Micro Small and Medium Enterprises) sector. According to CII, multiple actions are required to be taken on the steps concerning the filing of GST, an extension of bank loans, a special fund, and improving the welfare of workers. Also, CII stands ready to support the MSME sector in this need of the hour by way of the CII COVID Rehabilitation and Relief Fund.

Further, according to CII, as we all know that MSME sector is facing a cash crunch, so the CII has requested for the additional ad-hoc sanction of the working capital to the amount of 25 per cent of the sanctioned limit as a relief measure. Moreover, the industry body also suggested the deferment of EMIs and interest rate on the working capital as well. Furthermore, the setting up of a special MSME Factoring fund is also decided in order to enable MSMEs to discount their bills to the approved retailers within a period of 15 days and allow retailers to pay the same in 120 days as it would help in faster realization.

CII also stated that the creation of a corpus by the Government in order to assist MSMEs tide over the crisis would help them in paying wages. On the other hand, extension of the norms concerning NPA (Non-Performing Assets) in genuine cases from 90 days to 150 days.  Further, if needed by the industry, ad-hoc limits to the extent of 25 per cent of sanctioned limits may also be permitted by the banks on SOS basis in order to overcome the temporary liquidity crunch, would also provide temporary relief.

CII also said that there is an urgent need for taking measures for improving the welfare of the workers working in the MSME sector during the temporary shutdown period are needed as well. Some of these measures could include –

  1. Supporting the laid-off workers throughout the crisis period,
  2. Handling the statutory compliance of compensating the workers in case of a shutdown
  3. Exploring the Insurance cover options by way of the Employee State Insurance Corporation (ESIC),
  4. 90 days extension for the payment of Employer’s contribution in PF and ESIS,
  5. Insurance cover or the part financing wages for those who laid off due to the Corona Virus by way of ESIC or
  6. The new government schemes, allowing the use of CSR funds in order to support payment of wages to the laid-off workers, among others.

According to CII, the following listed are the other measures which could significantly ease liquidity crunch and other pressures on the MSME sector and would also assist the sector in coping with the current crisis –

  1.  Extension of the period for declaring NPAs by MSMEs,
  2. Allowing rollover of the term loans and the implementation of a moratorium on EMIs for the industrial loans and faster tax refunds,
  3. Allowing banks to extend the credit limit for MSMEs by 20 per cent at branch level, among others

The CII has further declared, that the Government must draw up contingency plans for three periods till 31 March; for next 2 months till 31 May and then for the next 2 months till 31 July. Moreover, there should also be close monitoring of the Payment Delays by the CPSUs to MSMEs by way of a portal used for the complaints, and necessary funds are offered and utilized for this purpose should also be ensured. Moreover, the banks should be permitted to extend prevailing Credit Limits for MSMEs by 20 per cent at the Branch Level.

Further, CII added that the Relief must be provided so that the credit rating of renowned Brands and Retailers is not adversely affected because of the delays in the repayment of bank loans, EMI, interest etc along with ensuring that no punitive action is taken by the NCLT (National Company Law Tribunal) for the delays of repayments etc. till 31 December 2020.

CII has 67 per cent of its membership as SME (Small Medium Enterprise) and works closely with the Ministry of MSME (Micro Small and Medium Enterprises). CII (Confederation of Indian Industry) also organized a special virtual meeting for its SME members for assessing the impact of COVID-19 on their businesses and also bring out some significant suggestions to mitigate the adverse impact. In this virtual meeting, more than 100 MSME members from across India participated representing sectors of light engineering, forging, electronics, auto components, ceramics, construction equipment, financial services, pharmaceuticals, décor solutions, chemicals, IT and ITeS, etc.

Also, read: Impact on Start-ups Business amidst Coronavirus (COVID- 19)

Measures which are taken by the Government

Recently, the Indian government has also offered some reliefs and liberations to the country as the Union Finance Minister, Ms Nirmala Sitharaman declared the following listed measures, which may be specifically beneficial for the MSMEs:

  • The default threshold limit for initiating insolvency proceedings under the provisions of the Insolvency and Bankruptcy Code 2016 (IBC) for the MSME sector has been increased from the previous limit of Rs 1 lakh to Rs 1 crore.
  • Relaxation has been provided on the norms for holding a board meeting to 60 days. This specific relaxation shall remain in force for the next two quarters.
  • The due date for completing the pending payments of the central and excise duties has been further increased to 30 June 2020, that too without any interest or late fee.
  • The due date for filing the GST (Goods and Service Tax) Returns has been further extended till 30 June 2020, and no late fee or any kind of penalty will be charged or imposed for the companies with annual turnover less than Rs 5 crore for the late filing. Further, the companies which are having the annual turnover of more than Rs 5 crore, the only interest of 9 per cent will be charged on them.
  • All the last dates with respect to the income tax returns and filings have been moved further to 30 June 2020.

It was also declared that the ministry might also consider suspending Section 7, 9 and 10 of the Insolvency Bankruptcy Code (IBC) which relates to the insolvency proceedings, for a period of 10 months. These measures are done in order to ease the burden of the MSMEs sector to some extent, but the government could also consider –

  • Special provisions for the MSMEs (Micro Small and Medium Enterprises) under the GST Act to ease out their burden
  • Reduction of tariffs on the facilities such as electricity, water, etc
  • Interest subvention on the working capital to a certain percentage in order to decrease the burden regarding the working capital of the companies
  • A different tax slab for the MSMEs under special circumstances
  • Freeze loan accounts in such extreme situations for a period of two months, so that the MSMEs accounts are not declared as NPAs (Non-Performing Assets).

If the Central Government is able to provide these relaxations, grants and benefits, it will result as a saviour for the MSMEs, as it would assist them in surviving the economic slowdown being caused by this epidemic. A significant factor leading to the implementation of such provisions would be the conditions of the economy of the country itself. The government should consider some of these steps in order to save the MSME sector.

Conclusion

The COVID-19 epidemic has hit the MSME sector at such a large scale and speed that there are chances that nearby to a quarter of these firms will face closure if the current lockdown, induced by COVID-19, goes beyond 15 April 2020 while a staggering 43 per cent will shut shop if the panic spreads beyond the period of eight weeks. Further, the businesses dealing in the ‘high contact’ sectors such as the retail and hospitality sectors, as these sectors will be the most adversely affected. So, in order to save the MSME sector from the prevailing crisis, various reliefs have been sought by CII (Confederation of Indian Industry) from the government. Whereas the Central Government has recently declared several relaxations and grants for safeguarding this sector from the prevailing crisis. Lastly, the government has also declared that the ministry may also consider suspending Section 7, 9 and 10 of the Insolvency Bankruptcy Code (IBC) which relates to the insolvency proceedings, for a period of 10 months in order to ease the burden of the MSMEs sector to some extent.