Small and Medium Enterprises: Lifeline of the Indian Economy Badly Hit by COVID-19 Wave-2

 Fiscal Stimulus the need of the hour for SME Sector to survive the Second Wave of COVID-19 in India.

 The second wave of COVID-19 has had a huge impact on the Indian economy and maximum of the brunt has been experienced by the SME sector. With supply side bottlenecks, demand side restrains and lack of funding due to risk aversion of lenders an appropriate fiscal stimulus is much needed to kick start the economy and save the SME sector.’

 The second wave of COVID-19 has had a huge impact in India. Lakhs of people have lost their lives and the economy has taken a huge setback. The start of 2021 appeared to be on a positive note with demand coming back to a great extent and constrains on the supply chain sorted. However just as green shoots emerged in the Indian economy the second wave of COVID-19 caused huge disruptions and life as well as livelihood got affected to a very large extent. Due to the large amount of cases, the pressure on the medical infrastructure was huge which resulted in large amount loss of life. In order to control the loss, strict lockdowns were imposed across states which had a huge impact on the livelihood of people.

 The maximum of the damage was felt by the SME sector. With supply side constrains in terms of availability of manpower to raw materials and free transport; on the demand side a huge impact in terms of the lockdown and also due to loss of life and uncertainty of the future a large amount of the population has deferred the consumption. This can be adequately seen in the two wheeler sales numbers. With issues on the demand as well as the supply side the Indian economy has been hit to a large extent. The biggest hit has been witnessed in the SME sector which is the lifeline of the Indian economy and employs a vast majority of the population. SME companies play a very significant role in the Indian economy contributing to almost 45% of the overall GDP and providing employment to almost 40% of the Indian population. Services sectors like hospitality, tourism and aviation which had just started recovering were hit hard by the second wave of COVID-19 and find it almost impossible to survive without appropriate fiscal support.

 The SME sector is the backbone of the Indian economy which supports almost 45% of the working population and contributes over 40% nearly a third of the GDP and also employs in excess of 110 million people. Having a total of over 60 million units across the country, accounting for about 45% of the manufacturing output and 40% of the total exports of the country.

  Estimated Number of SMEs in Lakhs

Category

Rural

Urban

Total

Manufacturing

114.1

82.5

196.6

Trade

108.7

121.6

230.3

Services

102

104.9

206.9

TOTAL

324.8

309

633.8

 The breakup of number of companies that are in the SME segment clearly indicate that 31% of the SMEs are involved in the manufacturing sector, 36% in trade and 33% in services industry. Hence the manufacturing and service sector is of prime importance to the SME segment. With the significant weightage of the manufacturing sector in the overall SME segment which being a capital intensive sector, the credit off-take in the overall economy is of prime importance. Over 82% of SMEs in India said that they had a negative COVID-19 impact while 70% believed their pre COVID-19 level recovery to take nearly a year thereby clearly illustrating that the COVID-19 impact on SME has been substantial.

 On the monetary side, RBI also announced a loan restructuring scheme for small borrowers amid the pandemic. RBI retained its growth forecast at 10.5% for the current financial year while ADB (The Asian Development Bank) projected a growth rate of 11% for this fiscal year. To incentivise credit flow to micro, small and medium enterprise (MSME) borrowers, scheduled commercial banks in February 2021 were allowed to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR). With leading rating agency Moody’s projected growth of 9.3% for current fiscal year, lower than 13.7% estimated earlier.

 COVID-19 loans / additional loans were given to SME companies last year during the first wave of the pandemic which were interest free loans for three years. If an SME availed a loan of INR 2.5 crores with an annual interest rate of 9%, the annual repayment of principal would be approximately INR 83 lakhs with interest being approximately INR 25 lakhs. With business coming to a complete standstill in many cases, the ability to repay this loan has become almost impossible. In case of another top-up loan is given to encounter the second wave, large portion of it will go to service the first loan taken, thereby resulting in a debt trap for the SME with over leverage on its balance sheet. 

 Liquidity infusion and fiscal expenditures are very different things. The first impacts the availability of cash and credit in the economy. The second directly raises aggregate demand and leads to economic growth. It is widely understood that during an economic downturn, liquidity infusion does not help much because aggregate demand itself goes downhill, including the demand for credit and money. In order to push demand massive public investment is required so as to get the push in the economy and overall employment generation and push the GDP. 

 The need of the hour for the SME sector is to get a fiscal boost and help from the Government. The boost from the Government can be given in terms of cashflow to the SME companies by realizing of all pending payments from local bodies, State Government and Central Government payments. This will not add any additional burden in terms of additional borrowing by the Government but will be a big step in easing the worriers of the SME sector which will lead to overall growth in GDP.

 In order to give a fiscal boost, the biggest factor is the overall Government debt touching 90% of GDP, thereby resulting in breaching of the FRBM Act ceiling which may result in a lowering of the sovereign rating. India’s sovereign rating at present is BBB-last stage of the investment grade rating. If it slips any lower it will result in becoming speculative grade thereby resulting in large amount of capital being withdrawn from India and substantial lower foreign investment into the country. With the lower GDP due to the pandemic and higher spending, with the shrinking of the denominator it will add further pressure to the overall debt management of the Government.

 An appropriate fiscal benefit is the need of the hour for SME companies. With the large amount of spending that the Government has been forced to undertake in the overall health and infrastructure sector, the chances of a very big and elaborate package for the SME sector is unlikely, keeping in mind FRBM ceiling with an eye on India’s sovereign rating.

 In these turbulent times where the economy has taken a big hit, investors should keep an eye and look at investing on a long term basis. SME companies that are listed on the stock markets either on the main board or SME exchange that have demonstrated a good track record in the last 12 to 15 months as they will continue to do well and outperform as and when an appropriate package is given to the SME sector by the Government, as it is only a matter of time when rather than if a prudent fiscal package will be given.

 _Farzan Ghadially.