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How Different MSMEs Are Planning To Respond To Covid-19 Crisis?

While their issues or concerns are similar, we observe interesting differences in the response mechanism depending upon the size of the firm. We divided the firms in three sizes:

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This article summarises the finding of a survey that was sent to 120 MSME owners of different industries to understand what kind of challenges they are facing, what initiatives are being taken by them to deal with covid19 crisis, and what kind of expectations they are having from the government. 50 MSMEs responded to the survey. These represent 22 different sectors like textiles, steel, mining, food, IT and apparel design, handloom, FMCG etc.

Most of the respondents had similar concerns; the top five amongst the shared concerns are:

1) Working capital related issue: MSME owners are facing working capital crunch and figuring out ways to deal with it.

2) Labor related issues: MSMEs are paying the labour that is not working but they are not happy about it. Some are worried that the moment lockdown is over and intercity and inter-state mobility is allowed, labour will rush back to their native places and owners won’t be able to revive the business. Some are worried about paying employees who are working and also paying employees who are not working. This is causing friction among employees and deteriorating work culture. Many MSMEs are in labour intensive industries and that has led to high cost for them.

3) Customer related issues: MSMEs are worried about existing clients and fear losing them. There are no upcoming orders for the next quarter. 

4) Logistics Related Issues: Supply of raw material and movement of materials is considered to be a huge issue. Fluctuation in raw material prices has led to higher costs as well.

5) Other costs: cost of existing inventory and how that will be cleared given the demand would go down substantially even after the lockdown is lifted up. Some are worried about property tax, house tax, municipal tax etc. Suppliers are asking for advance payments which is difficult given there is a cash crunch. Other fixed costs like rentals, license fee, internet fee etc. are additional burdens on these MSMEs.

While their issues or concerns are similar, we observe interesting differences in the response mechanism depending upon the size of the firm. We divided the firms in three sizes:

a) Micro firms: turnover less than 5 crores; our sample had 25% firms in this category

b) Small firms: turnover between 5 to 100 crores; our sample had 49% firms in this category

c) Medium firms: turnover between 100 crores to 500 crores.; our sample had 26% firms in this category

We share the various initiatives or responses that MSME owners are considering in the near future.

a)Most of the micro firms’ owners (with turnover less than 5 crores) shared that their priority is to diversify their portfolio; businesses which were dependent only on exports want to tap Indian market as well. Businesses especially in the manufacturing sector want to add new products in their portfolio so that the future is safe. It appears that these firms are preparing themselves to start the businesses again with less hope in the current businesses. Some of these owners are of the belief that nothing is in their control; they wish that the government could share the financial burden of wages and salaries to labourers and staff. They seem to be more empathetic when it comes to paying off staff and labour and are trying to contribute to the extent possible.

b)Small firms’ owners with firms’ turnover between 5 cr to 50 cr are completely focused on increasing sales and clearing inventory; most of the initiatives shared by them were related to increase in digital marketing effort, reaching out to customers and selling products at cheaper rates. They seem to be focusing more on operations and retaining customers than on profitability. They want to cut down wages but are scared of losing employees. For labour, they are providing them ration and basic facilities but not cash payment; to facilitate this, they are using credit terms with mom and pop stores. They are thinking of creative ways to generate cash and get payments from buyers even if some kind of discounts are to be offered.

c)Medium sized firms with turnover of 100 cr to 500 cr are more in wage cutting, salary deduction, rolling back incentives and lobbying with the government to give waivers on tax, interest payments etc. These firms’ focus is more on getting the credit limit increased from banks and increasing cash flow in the business. Some owners talked about initiatives related to automation but that is a far-fetched goal given the capital intensive nature of automation.

The above description shows that the response mechanism varies depending upon the size of the firm. Small firms are focusing on increasing sales indicating their focus is more on revenue generation; for these firms, generating revenue without credit would help them mitigate working capital crunch. Medium sized firms are focusing more on cutting major expenses related to taxes etc. and have a focus on cost cutting; for these firms, reduction in expenses and immediate payouts would help them in mitigating working capital crunch.

On the other hand, Micro firms, surprisingly, are thinking more long term and want to diversify their portfolio both in terms of product and geographic diversification. These owners did not talk about generating more revenue by giving out discounts or cutting down costs however they had shared about falling revenues and incurring costs as major concerns. It could be because these firms do not have much bargaining power so these owners do not think they could play much role until and unless a normal business cycle kicks in on its own (by someone else’s interventions). So, they are focusing more on what can be added to the existing business; what new products, services, and geographies can they think of.

When asked about possible government interventions, every respondent expects the government to waive taxes, direct banks to stagger interest payments and pump in some liquidity so that supply and demand can be pushed. Their perception is that the government might end up taking initiatives only for pushing the supply side without giving enough stimulus to the demand side and which might not give a fruitful outcome. Many medium sized firms’ owners see Covid19 crisis as a great opportunity for India and Indian companies in terms of their role in the global value chains. These owners are hopeful that the Indian government will be liberal on policies related to manufacturing in India so that these companies could expand scale quickly and play an important role in the global value chain. They also shared that import of raw material should be facilitated because some sectors like Copper are dependent upon import of raw materials while import of final goods or products from countries like China and Bangladesh should be restricted to facilitate indigenous manufacturing. Micro firms’ owners expect the government’s support in paying out salaries to staff and labour.

The above is a summary of what respondents of the survey have shared. MSME sector is having high hopes from the government and is looking forward to waivers in terms of taxes and interest payments. These owners expect the government to help them in retaining labour in their factory premises so that factories could resume operations once the lockdown is lifted.

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. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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msmes COVID-19

Prof. Chitra Singla

Associate Professor in Business Policy Area at IIM Ahmedabad

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