Impact of COVID-19 on MSME Sector in India

YRSK | Published: 13-07-21
As the Indian government, institutions and citizens continue their cogent fight against the COVID-19 pandemic, it is important to manage the issues and challenges faced by MSMEs in the country. The Micro, Small and Medium Enterprises segment is the second-largest employment generator in India, after agriculture. With the COVID-19 outbreak and subsequent countrywide lockdown, MSME owners, employers and external stakeholders seem to have been hit unprecedentedly, exposing an array of challenges that they will take long to recover from.

Defining MSMEs: What is referred to as the MSME Sector in India?


The MSME sector in India is not just widespread but also deep-rooted, and a breeding ground for the country’s upcoming band of entrepreneurs. The Indian Government has a dedicated ministry for the segment, the 2020-21 Annual Report of which states that the country has around 6.33 crore MSMEs in all.  


According to the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006, MSMEs may be defined as “all enterprises engaged in the production of goods pertaining to any industry specified in the first schedule of Industrial (D&R) Act, 1951 & other enterprises engaged in production and rendering of services subject to limiting factor of investment in plant & machinery and equipment respectively.”


Previously, the segment was understood in terms of the threshold level of investment in plant and machinery equipment. However, the feasibility of such a definition in the Indian context started being questioned even before the pandemic’s onset. A change was triggered by the COVID-19 crisis in the country, leading to the addition of annual sales turnover for the definition, besides changing threshold/upper limit values. This modification encourages the size expansion of smaller enterprises, induces them to undertake greater investment, and eliminates competition against larger enterprises.


COVID-19 and the MSME Sector in India


While it may be difficult to estimate the exact number of businesses and employers in the MSME segment in India, one fact is for certain: the sector is an integral catalyst for the socio-economic development of the country, and the much-needed shift from disguised employment in agriculture. However, even before these strengths of the MSME sector could be leveraged, the pandemic and nationwide lockdown dragged all stakeholders of the segment into a never-seen-before turmoil.


According to a survey by LocalCircles, around 59% of start-ups and MSMEs in India expect to scale down, shut down or even sell themselves, after the more disastrous and unexpected 2nd Wave of COVID-19 in the country. About 41% of these businesses have either exhausted their funds or have less than 1 month to go before they run out of them. Amid an atmosphere laced with uncertainty and struggles, a look at singular aspects of this impact tells a more detailed story.


Slashed Footfall

A statement by the Confederation of All India Traders (CAIT) reveals that several businesses in the MSME segment across the country have faced the brunt of a sharp reduction in the footfall of consumers over the last 18 months. Starting from the stringent nationwide lockdown to local containment zone restrictions, part-time or even all-day curfews and then the 2nd Wave, establishments such as shopping malls, restaurants, local shops and others have not been able to sell their goods because of the absence of customers and employees.


Projects on Hold

Small and medium enterprises associated with the Construction Industry have also faced severe challenges due to the COVID-19 crisis. Several infrastructure projects across the country were stalled due to supply chain management disruption, problems in transportation and project financing, labour shortages and the need to comply with WHO guidelines.


Customers Unwilling to Spend

Changed consumer sentiment is also playing a key role in dropped sales of businesses in the MSME segment. The survey by LocalCircles shows that around 70% of consumers had stated their unwillingness to visit malls or restaurants in 2020, even if the lockdown was relaxed.


Minimal Web Presence

According to Endurance International Group (EIG)’s online survey, lack of technical expertise and the perceived additional costs of building a strong web presence were some of the main factors that kept several businesses in the MSME industry from taking a step towards digitisation. During the pandemic, since the web was one of the only points of contact between customers and shops, a majority of retail, educational services, technology services, consultants and others had to temporarily shut down.


Responses and Relief Measures to Revive MSMEs Safe


The prevailing uncertainty and economic slowdown triggered by the pandemic needs a push for the revival of the MSME sector and its dying market. While the Indian government’s clarion call for responding to these challenges is based on self-sustainable values, it has taken several steps in the right direction.


Tax Regulations and Dates Relaxed  

The Indian government was quick to extend Income Tax Filing dates multiple times, while also reducing late payment interest, among other organizational let-ups. The move was targeted to help traders and owners of MSMEs deal with the temporary stalling and get sufficient time for recovery.


Bank Credits Eased

The Reserve Bank of India also came forward to reduce interest rates gradually, besides announcing moratorium periods for term loans repayment, and extending them when the situation did not seem to improve.


Special Packages Announced

Divided into multiple tranches, the Indian government announced several packages to facilitate credit to micro, small and medium enterprises of the country. From collateral-free loans to subordinate debt for addressing equity issues and much-needed credit facilities for informal businesses and street vendors – the government’s moves have been targeting the most afflicted sections of the Indian economic framework.  


Eyeing the Future: A Race for Survival

The MSME segment has been at the helm of Indian economic development, contributing to a third of India’s GDP and providing employment to millions of citizens over the last few years. The pandemic has definitely acted as a roadblock to the sector’s lifeline, but in a way, it has also made one thing clear – the MSME segment needs reinforcement in various aspects: digital, financial, structural and technological.


The need of the hour is a detailed examination of the response of other countries to the pandemic’s disastrous impact on small-scale enterprises. More governmental measures are needed in the direction of informal/unorganised firms, which form an overwhelming majority of India’s socio-industrial landscape.

Rather than a top-down approach, a bottom-up approach taking state governments and local governments into the picture will prove more beneficial in impacting lives. Given the size of the MSME sector in India, reinforcing businesses, owners, employers and other stakeholders in the industry is not just essential but also imminent to ease the impact of the crisis and lead India on a way to economic revival.