COVID-19: The Unemployment Conundrum in the MSME Sector of India
Higher levels of unemployment and lower incomes amongst those employed will mean that the disposable income will reduce significantly thereby, reducing spends.
The Indian MSME sector is a key sector for the growth of the country and for generating employment opportunities for lakhs of Indians. As per the Ministry of MSME, Govt of India, MSMEs contribute about 29% to India’s GDP and about 45% to the overall exports from the country.
However, Indian MSMEs have always been vulnerable to market factors. Every downturn in the market has impacted the MSMEs adversely. At the same time, these MSMEs are also the most resilient and they have bounced back every time the situation improved.
Unfortunately, the pandemic has not been very kind to the MSMEs of India. MSME owners are not known for their immaculate financial planning and many of the businesses survive with limited surplus funds for personal and business purposes. With an extended lockdown, several business owners ran very low on their available funds to meet their day to day needs forcing business owners to make difficult decisions including closing down the business. This has been further accentuated with reverse migration from larger cities where owners of small businesses decided to shut their business and head back to their native state/ village.
However, with the lockdown easing and businesses reopening, many of the MSME business owners are seeing the light at the end of the tunnel. Business owners are hopeful that they will start seeing revenues coming in. However, they are under no illusion that things will be back to the pre-COVID times. Business owners realize that the year will be a taxing one from the financial perspective, more so, as businesses reopen and the situation heads towards the new normal. As a matter of fact, the second round of Kantar’s COVID tracker amongst Micro & Small business owners that tracks the sentiments of business owners indicates that there are more businesses (about 81% of them) that are currently concerned about the financial health of their business than in April when the lockdown had been initiated (at about 60%).
However, with businesses easing back to work, there has been an improvement in the availability of working capital. As per the Wave 1 study conducted in the first week of April, less than 50% of the businesses surveyed had more than 2 months of working capital. With the slow opening up of businesses, about 68% of the businesses stated that they will have more than 2 months of working capital.
With lower revenues coupled with lower customer demand and an uncertain future inflow expected to be the new normal, businesses are focused on conserving cash to tide over the situation. Therefore, they are aggressively exploring ways and means of reducing costs, especially fixed costs. This enables them to free up some of the fixed costs for alternative purposes.
The easiest of the fixed cost that businesses can reduce is that of employees and that is what the Micro & Small businesses are targeting first. As per the study, about 16% of the businesses are looking at terminating about 30% of their employees over the next two months. In addition, another 15% of the businesses are looking at reducing salaries for some or all of their employees by a third.
All of these will have a ripple effect on the economy. Higher levels of unemployment and lower incomes amongst those employed will mean that the disposable income will reduce significantly thereby, reducing spends. Moreover, the higher unemployment will further bring down the effective wages that businesses will need to pay to employ new recruits which may result in higher terminations too. All of this will have an adverse impact on the economy and the time it takes to resurrect itself.
However, this could also have a silver lining as it could help solve the issue that labor-intensive businesses are facing due to the reverse migration. With a large number of the migrant workforce heading back to their native states and villages, there is a growing concern of the ability of these businesses to restart and gain full strength even after the restrictions are lifted. The availability of employees freed by Micro & Small businesses could mean that they can be gainfully employed by some of these labor-intensive businesses. It could result in a win-win for both businesses and employees.
Having said that, the Micro &Small businesses do need immediate support to tide over the current crisis. These businesses are far too important for the Indian economy to be ignored for long. The Government of India realized the importance of this sector while working on the fiscal stimulus and
provided for a slew of measures for this sector including providing collateral-free loans backed by sovereign guarantee. It is too early to pass judgment on the success or failure of the incentives and the impact it has on MSMEs.
It is evident that India will come out of this crisis faster if it is able to manage its MSME sector better. That means higher liquidity, building confidence, and generating employment in these sectors. It will be important to drive these as three key goals for all stakeholders.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house