Small is not always Beautiful

Small is not always Beautiful

How MSMEs in India are facing COVID19 Scenario

Without any doubt, SMEs are one of the key drivers behind India’s growth story. The MSME Sector consisting of 36 million units, as of today, provides employment to over 80 million persons. MSMEs not only play a crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. Acting complementary to large industries as ancillary units, this sector contributes about 8% to GDP besides 45% to the total manufacturing output and 40% to the exports from the country.

However, the sector is in dire straits today with COVID19 inflicted lockdown and facing multiple challenges – often reaching to the levels of survival. As part of my regular interaction with the MSME industry players, what I could gather was that the biggest challenge that they are facing is about liquidity wherein on one side, the large corporate customers of theirs have put a hold on their payments to preserve cash, the suppliers to these MSMEs, especially the larger corporations are chasing them for payments. Stuck in between this conundrum, most MSME unit owners are faced with a dilemma about salary payments and holding back their staff.

Let’s understand these challenges in a little more detail. 

Crushed from all sides

On customer side, most MSMEs are suppliers to a large Corporate (often called as OEMs in the industry terminology), either directly (Tier 1 vendors) or indirectly (Tier 2 vendors, which supply a certain component to a Tier 1 vendor). While the large corporate, being the responsible corporate citizen have made sure that they pay out to their direct vendors ie. Tier 1 vendors – more often than not the money trail is stopping there itself. Tier 1 vendors (larger MSMEs) are stuck with clearing their dues, paying salaries and other fixed costs while holding on to the payments of smaller Tier 2 vendors as this group lacks bargaining power. One of the MSME unit head from Pune, Maharashtra on condition of anonymity shared that “OEMs need to push Tier1 vendors to clear payments to Tier2 vendors, otherwise soon the whole procurement chain would come to a grinding halt if the Tier 2 and Tier 3 vendors are not able to survive and forced to shut shops.” This should be matter of serious lookout for all large corporations which depend heavily on their vendor base. 

On supply side, the story is similar ie. Ones who have better bargaining power over others in the whole supply chain, is calling the shots and holding up the payment flow. Larger suppliers to these MSMEs are not willing to extend payment timelines, to ensure sufficient cash reserves for themselves. Some are talking about interest on overdue payments and others are even going to the extent of blacklisting the MSMEs which are unable to pay in time – which means, even when the situation improves – these MSMEs are going to face supply chain disruption for them to get back on their feet. Interestingly, wherever the supplies are sourced from further smaller microenterprises, those are more willing and understanding to delay the payment cycle.

Fig: Vicious Cash Flow Trap for MSMEs

The combined crush from both sides has severely dented the cash flow at the MSMEs, wherein they are not even able to maintain the basic minimum working capital. First casualty of such a situation is the contract labour who gets rendered jobless and ends up becoming a challenge of ‘migrant labour crisis’ for the government, in their efforts to contain the COVID19 situation. The second casualty would be the permanent employees facing first the pay hold, then pay cut and finally job loss. One of the MD of a SME from Aurangabad, supplying to a 2-wheeler major, mentioned that “While the government is asking us not to hold payment of salaries and we also wish to pay but with all our efforts, we will be able to pay for next 1 or 2 months maximum, if things don’t change after that, then we are not sure on how to deal with the situation.” 

To top it up, the anxiety levels are running high among the MSME owners – as with the kind of media reports coming, there is an absolute uncertainty about when will the situation come back to normal. Inventory carrying cost itself is piling up every single day and there is a risk of losing business contracts too, with reduction in market demand. Many microenterprises are also resorting to plunge into personal family reserves to tide over the times. 

Role of Industry body

As frightening as the current crisis may look, how leaders respond to it will decide how well their organizations will grow once the economy starts recovering. MSMEs should utilize the slowdown to step back and take some strategic measures that will pay off in the long term.

While government is trying to put together an economic relief package – it is important that the MSME industry leaders must share their expectations from Government, which in turn must prepare a relief package which takes care of a) Concessional interest rate short term loans to MSMEs to tide over the time, b) Provide relief in terms of repayment schedule for MSME sector and c) Temporary tax relief for at least 2 years to the MSME sector. To boost the demand, governments can themselves get into procurement of the products from MSMEs whichever sector it is feasible 

In addition, the industry bodies like SEZs, Supplier parks, SIDCUL bodies etc. must ensure that they become a conduit of right and credible information for their members, in this time of information overload. These bodies should continue to raise awareness about the situation about their domain to both state and central government, to help enable appropriate policy support. Newer avenues should possibly be explored for their respective MSME members, possibly in a self-sufficient circular economy mode. Many of the MSMEs would also be willing to temporarily lend their plant / machinery setup, wherever possible, to support government initiatives in the fight towards Coronavirus. Such opportunities should also be tapped to ensure some continued work and employment to staff. Well-funded industry bodies can also use this period to run free training program for staff of their members.

This is also the time for the MSME industry body to pool whatever monetary and physical resources and support the survival of poorest of the poor in their value chain eg. Taking care of contract labour force. 

Going Forward

While lockdown phase is challenging, next few months after lockdown will continue to remain very challenging. Organizations must need to bring distinction between essential and non-essential spend and involve its employees in the process. Often the most powerful ideas come from the most unexpected quarters. In addition, the leaders must continue to communicate with employees and be brutally honest and at the same time, show optimism to the entire workforce. They must continue to maintain a personal relationship at all levels with buyers, suppliers as well as industry peers. These relationships will be what will sow the seeds for recovery, once it happens.

In current pandemic situation, small is definitely not beautiful for SMEs but the industry must hold on – this difficult time too shall pass. Time and again, the MSMEs of India have proved that they are incredibly resilient group. 

“On the other side of a storm, is the strength that comes from having navigated through it. Raise your sail and begin” – Gregory Williams

Authored by : Amol Dhakane, Co-founder and Head of operations, NuSocia

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