Can Indian MSMEs survive the Covid-19 pandemic?

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Micro, Small & Medium Enterprises (MSMEs) have held the economy of India strong and sturdy during the times of global financial crisis. MSMEs are also the source of providing huge employment opportunities to people. MSMEs comparatively require much lower capital cost than large scale industries or corporates. Due to spread of Covid-19, the MSMEs are facing certain challenges.

About MSME[i]

Categories of MSMEs

According to the Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified into two categories:

  1. Manufacturing Industry – The production of goods of any industry specified in the first schedule of the Development and regulation Act of 1951 or using the plant and machinery in the process of creating the final product.

 

  1. Service Industry - The industry engaged in promoting services to the consumers or to other enterprises.

The limit to purchase of plant and machinery in manufacturing sector / equipment for service sector is given below:

Manufacturing Sector

Industry

Investment in plant & machinery

Micro Enterprises

Limit of INR 25 lakhs

Small Enterprises

Between INR 25 lakh and 5 crores

Medium Enterprises

Between INR 5 crores and 10 crores

Service Sector

Enterprises

Investment in equipment

Micro Enterprises

Limit INR 10 lakhs

Small Enterprises

Between INR 10 lakhs and 2 crores

Medium Enterprises

Between INR 2 crore and 5 crores

How pandemic affected MSMEs

All the MSMEs other than those allowed by the Government to function are in lock down condition. Consider a case of the manufacturing sector. An MSME specializing in the furniture industry may shed some light on how the industry is currently having to face the hardship in the production.

A case of Patsons Engineering India Pvt Ltd

We interviewed Aniket Patil, the Director of Patsons Engineering India Pvt Ltd. The company is in the business of manufacturing and supplying of False Ceiling Sections and Drywall Partition Sections. These are used in ceiling and partition purposes in interior industry. The company provides this material which is used for interior decoration of the retail and office spaces.

In the current lockdown the company cannot manufacture the products. They can’t sell the products. They still have to bear the fixed expenses like factory rent, minimum electricity charges, wages of laborer which is needed to be followed as per the government regulation. Certain government benefits were provided as the installment on the bank loan taken by the company was refunded.

Since these products are customized and are used in real estate and construction industry. Hence, these products cannot be sold online and the construction site visit and interacting with the customer and designer is required.

After lockdown, the company need to take a stock of current position and take necessary action. An important step will be to procure raw material and then need to take all the dealers and direct contractors in confidence about the material availability to complete the projects.

A case of a furniture manufacturer

We talked with a furniture manufacturer who opted to be anonymous. The lockdown situation has affected his company as there is no production, not availability of raw material and laborer also. The company is also the not able to sell the finished goods which are still in the warehouse. This has resulted in huge loss. but the manufacturer said once lockdown opens up, he will first need to recover the outstanding payments from customers. In the due course, the company will buy the raw material and the production of the goods would be started. The company is not able to provide any work from home Due to nature of its business.

A case of an engineering company

We talked with a specialized products engineering company who opted to be anonymous. They said that, this lock down has affected the production since it is on hold. At the same time fixed expenses like rent are incurred. They will need to initiate cost cutting after the lockdown and will need to take necessary steps to overcome the situation.

Governments benefits provided to the MSME’s[ii]

As a relief to the MSMEs, the Government is providing income tax refunds of worth 5,204 crore, it has been released by the Central Board of Direct Taxes to help them in carrying their business activities without any pay cuts. Payroll subsidy of minimum 50% for 6 months is being provided. The government is also paying for the Employee State Insurance and Provident Fund payments. Electricity bill charges are said to be waived off, and electricity tax/interest in addition to effecting tariff reduction is necessary to deal with the crisis.

MSME ministry is working on increasing the credit guarantees to the sector to Rs. 5 lakh crores from the present level of about Rs. 1 lakh crore wherein 75% of the advances granted by financial institutions are covered by the government’s Credit Guarantee Scheme.

The Small Industries Development Bank (SIDBI) has decided to provide loan to the MSMEs which is involved in producing the essential goods on corona war. SIDBI is lending loan of Rs 50 lakh to 1 crore at an interest rate of 5 %. There is no need for guarantee or mortgage for the MSME to get the loan. SIDBI is not charging any processing fees for this loan and no additional charges will be levied on pre-payment. SIDBI is offering Working Capital facility to MSMEs to meet their operating expenses, purchasing inventory, receivables financing, etc.[iii]

The MSMEs will need to identify which of their team members can start office related work from home. Basically, if you have a simple phone also you can start work from home. For some tasks Internet will be required followed by for some computer will be required. The MSMEs can call their customers for maintaining positive customer relationship. They can also be in touch with the suppliers. Prospective clients can also be contacted to develop a dialogue. This is not a time to take rest but it is a time to work for safeguarding our future!

 

Authored by Dr Sachin Bhide, Founder & Strategy Designer and Sukruth Dhone, Research Assistant at Eha Management Consultancy

[i] https://msme.gov.in

[ii] www.business-standard.com

[iii] https://sidbi.in/en/products/working-capital

www.moneycontrol.com

www.economictimes.indiatimes.com

https://smefutures.com

https://www.ofbusiness.com

https://economictimes.indiatimes.com

www.inventiva.co.in

 

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