A third of Indian MSMEs closing as demand plunges

22, Jun. 2020


By Atul Ranjan

NEW DELHI, NNA - More than a third of small businesses in India are calling it quits after running out of cash in the country's worst economic carnage in modern history.

According to a recent survey by All India Manufacturers’ Organisation (AIMO), over 35 percent of MSMEs (micro, small and medium enterprises) and about 37 percent of self-employed people have already started the painful process of shutting down their business for good.

The business fallout from the coronavirus pandemic and stringent lockdowns across the country has wrought havoc to the country's 65 million MSMEs which employ over 150 million people.

More than 130 million, who are regarded as self-employed, are struggling to stand on their feet as demand following the easing of lockdowns has been too weak to sustain a business for many. In addition, countless have also lost jobs and contracts.

The impact of the COVID-19 crisis is likely to push MSMEs deeper into the red by 17 to 21 percent in the current fiscal year ending March 2021, said credit rating agency Crisil Ltd. last week.

This is a far cry from their average revenue growth of 4 to 5 percent achieved between fiscal 2017 and fiscal 2020, noted the India-based unit of Standard & Poor's Financial Services LLC.

K.E. Raghunathan, immediate past president of AIMO, told NNA, “Those looking to shut down their operations see no chance of recovery in their business…they just want to quit.”

This is happening despite the government announcing financial packages to help MSMEs tide over the current crisis, he said.

“We haven’t witnessed this kind of mass destruction of business since the country’s Independence (in 1947),” added Raghunathan.

The ongoing pandemic has driven the “final nail in the coffin” for many MSMEs which had been floundering in the country's economic slowdown way before the COVID-19 outbreak in China reported in end-December last year.

AIMO survey also found that over 70 percent of MSMEs intend to reduce headcount in a bid to survive tough times, he added.

Crisil said in its report last week that the 5 percent contraction in the Indian economy projected for this fiscal (2020-21) will significantly affect MSMEs across all the sectors. Those dealing in non-essential goods and services, construction and exports will bear the brunt most.

“Revenue growth of MSMEs in the real estate engineering, procurement and construction segment could almost halve with demand sliding even as rising costs, supply chain disruptions and labor issues exert severe pressure on margins,” the agency said.

Crisil found an alarming 70 percent of 40,000 companies have cash to cover employee costs for two quarters only. Most of such companies are MSMEs.

Previous downturns had shown that micro and small enterprises were "unable to manage transient working capital challenges as easily as their large and medium peers", said Crisil, adding that measures announced by the Ministry of Finance and the central bank will nudge banks and other institutions to lend more.

However, the bigger issue is demand, which needs to be revived for growth to improve sustainably, the agency concluded.