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Business amidst COVID 19- The way forward for the MSME Sector

Published :Dec 2022

Overview

There is lot of talk these days about the ‘World Post COVID 19’. While it is interesting to read a lot of these materials which talk about the way the world is going to change, one has to realise that COVID 19 is here to stay for a lot longer than a year and also the world has already changed! Every business, all over the world is struggling to deal with this reality. All sectors of business and trade are going through a crisis and no one is sure about what the future holds for them. If one has to stay to see the Post COVID world, one needs to stay afloat today. Wishful thinking will not help. World over, the economies are expected to shrink between 20% and 30%. This will impact the developed world and the developing world alike. A Bloomberg report says “Two-thirds of the world living in developing countries is faced with unprecedented economic damage, United Nations Conference on Trade and Development said in its new analysis, calling for a $2.5 trillion rescue package for these nations”. UN report warns about a recession to hit the economies all over the world with a possible exception of China and India without explaining why these countries will be excluded.

In such a scenario and where economies all over the world are shrinking, what does one do to keep business afloat and then thrive in the Post COVID World! This is a question that every CEO is asking and answers are not easy to come by. In India, prior to demonetisation, the biggest demand growth was in rural and semi urban areas of the country, which had already slowed down substantially prior to the COVID crisis and the lockdown which followed. In a country like India where almost 70% of the Population is dependent on daily earnings, the impact on demand, with lakhs of jobs being lost, is any body’s guess. The question on the top of the mind of the leaders of the country and the business houses are the same, how do we restart the wheels of the economy to see a revival in demand. Let us take a look at the present situation.

MSME Sector

There has been steep reduction in demand in all the sectors of the economy, and some estimates puts it at 20 -30% compared to last year. Whatever is the real figure, steep reduction in demand in almost all the sectors of the economy is a reality. When will the demand come back to pre COVID levels or will it ever come back to these levels at all?

In India 99% of the registered entities belong to the MSME sector. According to Data published by DGCIS, MSMEs contribute almost 30 per cent to India’s GDP and 50 per cent of exports. This makes it the backbone of the Industrial landscape, but also makes it the most vulnerable sector. As the economic activities have come down due to the prolonged lockdown in different parts of the country, due to the present COVID crisis, the impact on the MSME sector have been very high. According to survey conducted by Economic Times, nearly 50 per cent of MSMEs have witnessed a 20-50 per cent impact on their earnings. In this scenario, will the stimulus package offered by the central government have any positive impact on this sector? Does it make any sense to the MSMEs to take the credit offered with the Credit Guarantee scheme under the stimulus package? This will of course provide a much needed relief to the cash strapped sector. But the question one need to ask is, whether this will entangle the companies in a perpetual debt trap from where they will take a very long time to come out of or many not even come out of. Before one looks at the possible actions that can help MSMEs tide over the present crisis and move forward, it is import to examine the state of the economy and the future prospects. Let us have a quick look at some of the core sectors which reflects the state of the economy.

Steel

India is the second-largest producer of steel at about 112 million tonnes of steel output in 2019. The growth in the Indian steel sector has been driven by domestic availability of raw materials such as iron ore and relatively cheap labour. The steel sector has been a major contributor to the growth of the manufacturing sector in the country.

India’s finished steel consumption grew at a CAGR of 5.2 per cent during the last four years to exceed 100 MT, according to the data released by Department for Promotion of Industry and Internal Trade (DPIIT). The sector already hit by the slowing demand from the automobile and the realty sectors has been further hit by the slump in demand caused by the pandemic and sector is staring at 20% to 30% fall in demand from the last year’s level, in the current financial year.
The likely acceleration in rural economy, post monsoon and the growth in infrastructure sector are expected to lead growth in demand for steel. The head room for growth is also offered by India’s comparatively low per capita steel consumption and the expected rise in consumption due to increased spend in infrastructure and the transport sectors. If government decides today to go in for large scale investments in the Infrastructure sector, it is estimated that it will take at least about two years for the sector to reach the last year’s levels.

Cement

India is the second largest producer of cement in the world, production reaching about 335 million tonnes (MT) in FY20, providing employment to more than a million people, directly and indirectly. The sector was already hit by the slowing demand from the realty sector and slowing down of growth in the construction industry. It has been further hit by the slump in demand caused by the pandemic and the sector is staring at more than 30% fall in demand from the last year’s level, in the current financial year.

India has a lot of potential for development in the infrastructure sector and construction sector and the cement industry, like steel, is expected to largely benefit from it. Development of smart cities is also expected to provide a major demand boost. The move of government of India to provide tax relief to promote affordable housing and the urban rejuvenation and Smart city Mission are expected to push the demand for housing and commercial space in the medium to long term and is expected to boost the demand for cement. Government has also planned to upgrade 1.25 Lakh km of road length over the next five years. Due to the increasing demand in future from various sectors, such as housing, commercial and industrial construction and infrastructure, demand for cement is expected to touch 600 million tonnes by the year 2027.

Real estate

The sector has been witnessing a steep fall in demand for commercial and residential properties all over the country even before the COVID crisis. According to a report by Anarock demand for office space in India may see substantial reduction in the face of the pandemic situation and the readjustment imposed by it on companies worldwide. More than this, a longer term impact on demand will follow if the companies allow staff to continue to work from home even after the immediate crisis blows over. “Many companies may consider this as a long-term strategy”, the report has predicted and added that “demand for office spaces will be affected as net absorptions are likely to drop by 17% to 34% in 2020 from the pre-covid-19 projections” In Union Budget 2020-21, the Government of India has extended benefits under Section 80 - IBA of the Income Tax Act till March 31, 2020 to promote affordable housing in India. The Union Budget has allocated Rs 139 billion for Urban Rejuvenation Mission: AMRUT and Smart Cities Mission. Government’s push in these areas combined with Smart Cities Mission may compensate for the fall in demand for commercial space. But all this demand may take more than two years to kick in and that is the worry facing the industry, with large amount of unsold and under construction inventory.

Automobile

Quarter ending June 2020 saw substantial reduction in demand for Passenger and commercial vehicles.as per the auto sales data reported by which Siam. Passenger vehicle sales almost halved compared to June last year as the coronavirus outbreak and subsequent lock down measures and dented consumer demand caused large scale disruptions to manufacturing operations. In the two-wheeler segment, overall sales declined by about 39% compared to quarter ending June last year. We have to keep in mind that Auto sales in India are counted based on factory dispatches and not based on the sales at the dealer end. These figures could be even lower.

With their supply chains in disarray companies are struggling even now to ramp up production even after the unlocking measures have been kicked in. In some instances, coronavirus infections among factory workers have been forcing companies to close down operations, though temporarily. Some optimistic projections say that the current financial year will end with revenues reaching 65% to 70% of last financial year and the pessimistic ones point to 60 % to 65%. The reality could be somewhere in between. Industry estimates point to a two year period before it will reach 2019 levels.

Emerging Scenario

There is no doubt that the present situation aggravated by the pandemic has led to steep fall in demand in all the sectors. In a country like India, where the domestic demand drives a large part of the growth, recovery from the present slump could be faster compared to most of economies around the world. The supply side of the economy will benefit from the packages declared by the government. The demand pick up will take time as it will largely depend on investment by government and employment generation in the cities as well as in the semi urban and rural areas.

With the revenue from direct and indirect taxes going down substantially, the government will not have money to meet the revenue expenses and the committed capital purchases especially defence related purchases, a large part of which is imported. In this scenario, the government will have to take some bold decision to increase the spent on infrastructure multi fold, which will start turning the wheels of the economy and in the medium to long term improve revenue for the government to make further investments in the infrastructure sector and social sector resulting in inclusive growth. Unlike the western economies, India anyway needs the investment in the infrastructure space all over the country. This is one area where some innovative actions will help revive the demand, and keep the wheels of economy moving. The question is, will this government take such bold decisions.

Faced with the present crisis and elections almost four years away, it is possible for the government to take this decision. Recently the economic advisors to the government have also expressed the urgency to focus on the infrastructure sector. The infrastructure sector also has the potential to attract foreign direct investment. Growth in this sector will also lead to large scale investment in the capital good sector and lead to, revival of the economy, increase in employment and has the potential to put the economy on a new trajectory of growth. Such investment by government will put money in the hands of the people and will lead to increase in consumption and demand across sectors. Considering that the options in front of the government are few and there is a long way to go before the next elections, it is more than likely that government will go for the big push in the infrastructure sector and announcement in this regard is expected soon.

The way forward

In this scenario, what are the choices in front of the MSME sector to tide over the present crisis and to stay afloat for the next two to three years before the growth picks up? Some of the obvious problems being faced by the sector at present are; not many executable orders, cancellation of orders by their customers, high inventory of raw materials and parts, customers not paying them, new orders not forthcoming, high fixed costs including financial costs, shortage of cash etc. The immediate future is likely to be tough for all the sectors and MSME will not be spared. But, the future looks to be promising, with the large scale investment and growth projected in the core sectors of the economy.

It is important to take quick actions now to overcome the problems being faced and to remain ‘fighting fit’. Most of the company’s would need funds and the financial package offered by the government can help it tide over the present cash crisis and move forward. Obviously, this will add to the financial cost, pushing up the fixed cost, making it more unviable in the longer term. Hence the most important thing is to evaluate where such funds should be deployed and how well it is used, as a lever to solve the problems and improve the cash position. Companies can emerge stronger to do business in the post COVID world, provided they apply this cash intelligently to liquidate inventory and to generate more cash. It may also be important to look at other sectors of the economy with prospects for higher growth like renewable energy, electric mobility, robotics etc. The winners will be only those, who will take bold decisions to streamline operations and look at new opportunities to de risk, based on a longer term outlook and employ innovative ways to improve efficiency, and reduce cost.

For more discussions on consultation on this topic, please connect with joseph.chaly@camsconsulting.in / www.camsconsulting.in