Small units in distress as pandemic drives away business (The Hindu)

Mains Paper 3:Economy 
Prelims level: MSME sector
Mains level: Pandemic impact on MSME sector 

Context:

• The MSME sector, comprising 6.33 crore enterprises, is predominantly ‘micro’ (99.4 per cent), with small and medium enterprises accounting for 0.52 per cent and 0.007 per cent of the sector respectively. 
• A survey of MSMEs a week before the announcement of the lockdown, to estimate the impact of Covid on current and future business and the sector’s response.

SOS from MSMEs:

• About 50 per cent of the MSMEs surveyed reported lower order books in Q4 2020 (January-March 2020) compared to the corresponding quarter in the previous year, as also compared to the previous quarter (Q3 2020), 29 per cent expected order books to shrink by more than 50 per cent. 
• About 25 per cent of those surveyed reported a 20 per cent increase in finished goods and raw material inventories each in Q4 compared to the previous quarter due to Covid, and 17.5 per cent reported 50 per cent lower capacity utilisation compared to the previous quarter.
• However, paradoxically, while 72 per cent agreed (strongly) that their receivables had been affected by the pandemic, an overwhelming majority (78 per cent) felt that their receivables would be affected only up to 30 days. 

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How does one interpret these results? 

• The absence of a tangible policy response such as a declared lockdown, led to most respondents failing to factor in the true nature and impact of Covid. 
• The MSME distress call could only be greater in the aftermath of the lock-down.
• The survey also revealed the global inter-connectedness of the Indian MSME sector. 
• More than 50 per cent of the respondents confirmed that the pandemic would impact their global sourcing, while an equal proportion confirmed the impact on their global markets. 
• Thus, any volatility in global markets would prove to be a double-whammy for Indian MSMEs.

Jobs on the line:

• The survey revealed the high employment-elasticity of the MSME sector. 
• At the national level, statistics point to 97 per cent of the total MSME employment being generated in the micro sector, 2.88 per cent in the small and 0.16 per cent in the medium sectors.
• This was corroborated by our survey as well. 
• Thus, ‘small’ manufacturing plants and service firms across India typically provide employment to 300-700, while most ‘micro’ manufacturing enterprises employ 20-50 people, with micro service enterprises employing a lesser number.
• It is this employment which would bear the brunt of the pandemic. The largest item constituting financial burden according to the respondents was labour costs (34 per cent). 
• This was followed by raw material costs (18.8 per cent) and interest on loans (18.8 per cent). 
• Faced with distress, SMEs would opt to survive, and the first casualty would be a cut in labour. 
• Anecdotally, the number of SMEs keen on seeking counsel for dealing with tricky labour contracts when sales have dried up, has increased.

Conclusion: 

• While government financial incentives and packages are the need of the hour to ‘save’ the SMEs, the SMEs themselves need to heed to the economy’s distress call and understand their role in saving the economy. 
• Inefficient SMEs, seeking self-preservation through government relief packages at the cost of labour, may rightfully be allowed to succumb.

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Prelims Questions:

Q.1)With reference to the Fiscal Responsibility and Budget Management (FRBM) Act 2003, consider the following statements:
1. The law does not contain what is commonly referred to as an ‘escape clause’. 
2. The States have since enacted their own respective Financial Responsibility Legislation, which sets the same 3% of Gross State Domestic Product (GSDP) cap on their annual budget deficits.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer...................

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Mains Questions:
Q.1) What are the reforms needed currently in MSME sector?