Impact of COVID-19 on MSME & change in business dynamics

9th Apr 2020.

 

On 2nd March, I was attending a pre-bid meeting in Delhi at one Govt office. During the meeting the director suddenly announced _” First CORONA VIRUS PATIENT is detected in Delhi & it’s going to be really tough time ahead !” Next two days,We went from Delhi to Lucknow & returned via Mumbai to Pune. The Airports were full of travellers & the roads were full of vehicles-over-flowing like every India road/Airport. The Mumbai-Pune highway was under traffic jam. There were no signs of any catastrophe in waiting then.

 

Though we were getting the news of Covid-19 devastation in other countries,that time ,Little did we realised , the life will come to stand-still in less than a month’s time in India. Such was the ferocity at which the COVID-19 pandemic hit India& other world, that entire country is watching catastrophe helplessly, sitting at home & hoping that man-kind will find a way to over-come this crisis! Never in history we found entire man-kind surrendering to the nature & praying for its survival.

 

Suddenly every business person realised that they are in midst of recession, watching helplessly their business plans going hay-wire, dream shattered &uncertain future.

 

The COVID-19 has impacted global economy & its unique in the sense that it created supply,demand & market shock. The precariously place Global economy is in risk of recession in 2020-21 as nations are shutting down the economy activity to limit spread of covid-19. The virus outbreak disrupted manufacturing supply chain & what was previously a manufacturing only recession has spread to services sector.Also, as the production is curtailed,many firms will not have necessary inputs.A severe demand shock is likely for discretionary spend categories.For all major economies,Q1 GDP Growth will be impacted due to compete lock-down of economic activities in March & Q2/Q3 GDP may have an adverse impact due to falling consumption, business investment &exports.

 

India’s GDP was lowest for six years in third quarter of 2019-20.Steps taken to curtail Covid-19 ,couldbadly impact both consumption , investment cycle of its economy & also exports to Covid affected economies will take a hit.

Though the Indian economy still survives on domestic consumption due to its huge population , In last few years, It got closely interlinked with world economy & the recession in these economies could create major impact on India economy as well.

 

 

 

In the present circumstances there are possibly three scenarios which can emerge.

 

 

In Indian economy MSME sector is a major contributor for GDP growth. This sector contribution to GDP is estimated at 30-35 % of GDP & and it provides employment to almost 10-11 crore of population.

 

This sector is very vulnerable & is likely to impact in following ways.

 

a) Production Shut down will have a very high impact as it may lead to cascading impact even after lock-down eases due to domestic as well as global demand slow-down.

 

b) The cash flow will be severely impacted due to slow-down in demand & no clue on future investments, expansions or supply chain as all these will also be hit by recession. The working capital needs will go up.The pressure cooker situation will be there as (1) Banks instalments, Government dues will have to be paid mandatory (2) staff salaries & worker’s wages will have be paid & (3) supplies of raw materials in time to be managed simultaneously offering extended credits to customers for the goods supply.

 

c) The labour force will have to be laid off so also salary reduction among skilled staff/lay-off of skilled staff may have to done to ensure fixed costs are minimised to adjust to lower sales/profits.

 

d) The domestic supplies of raw material as well as imports will suffer in terms of cost & availability.

 

e) Negative sentiments as well as diminishing liquidity will impact the industry.

 

f) With Europe & US economy badly affected so also other economies,the exports will be badly affected.

 

If prolonged, it is quite likely that lock-down of economy would lead to closure of many MSME ,if Govt do not offer relief package to this sector.

 

This recessionary phase is fundamentally different from earlier recessions which were another turn of a business cycle.It has shaken up the entire world & we are likely to see new structural changes in the business which will be permanent in nature.

 

1. If India can contain the outbreak & provide a good stimulus package to MSME, then it will be treated as preferred destination for manufacturing as well as for services. The world has seen the uncertainties of setting up manufacturing set-up in China & thus India will offer a much SAFER/RELIABLE destination for these companies. The reliability index of India will be much better compared to China.

 

2. China has recovered partially from this outbreak resuming their economic activities & other economies are still struggling. There is a possibility that world over companies may have to depend on China in absence of other supply chains, for procuring raw materials & even manpower-skilled as well as un-skilled.

 

3. There are many countries like Shri Lanka, Pakistan so also African countries who have fallen prey to China’s debt trap. These countries may face demographic/political changes.

 

4. The business would try to become” localised” instead of “going global” to have better control on supply chain. For supply cycle, the focus will shift from “cheaper imports” to “reliable but not necessary cheap imports from nearby” source. The enterprise will look for more domestic business as exports may become risky & risk-taking appetite would be lower. Each enterprise would focus on building a local supply chain which would be reliable.

 

5. “DIGITAL” will get a bigger & quicker push for brick & mortar economy. Many companies, especially MSME are still working with old concept. But they will have to evolve a DIGITAL platform which will replace the present method of marketing so also supply chain. This will drive the efficiency of the enterprise. Interactive DIGITAL PLATFORM for customer/ supply chain will become common which would reduce the fixed cost for an enterprise. Digital Marketing will be used even for project manufacturing companies & capital equipment companies.

 

6. The companies which have adequate reserves will be able to ride through crisis better provided they utilise the reserves for right purposes & have business model to sustain the recession.

 

- The focus of business should be towards creating a cash-flow to cover the expenses & minimal profits instead of choosing higher profitability but delayed payments.

- The money to be utilised for ensuring proper supplies than for covering fixed cost.

- The inventory levels need to be minimal as the supplies would be adequate and available cheaply if money is available.

7. The most important thing will be to reduce the overall business cost. One possible way will be to efforts to convert fixed cost to variable cost where ever possible. Business will have to determine what must be kept in-house & what should be outsourced to reduce fixed costs. This is likely to affect the labour force so also skilled manpower as they are likely to be available cheaply outside.

 

8. The smaller companies are more likely to adopt collaborative/partnership approach with the companies which has similar set up. This will help them to divide the resources & save cost.

 

9. For capital equipment companies, there will be demand for products which are ready to install & use with minimal service support.

 

10. The business which offers skilled support at site for machinery/ instrument/control systems will be doing a good business as there are risks associated towards providing such manpower.

 

TO SUM UP THREE MAJOR CONTRIBUTORS TO GDP- DOMESTIC CONSUMPTION, INVESTMENT & EXTERNAL TRADE ARE LIKELY TO GET AFFECTED.