COVID-19, Breaking the Backbone of SMBs in India

The human toll of the COVID-19 is worrying as is its impact on small and medium-sized businesses. Indians, who have a reputation for disregarding laws, have become surprisingly compliant.  Across India, people are remaining confined to their homes. When outside, they are keeping each other at a distance and standing in queues while waiting to enter shops and buildings. While the decorum of the masses is good for the fight against COVID-19, it is breaking the back of small and medium-sized businesses.

The Impact on Small and Medium-Sized Businesses

Small and medium-sized businesses are the biggest employers in India. They employ approximately 50 crore workers and account for a quarter of the country’s GDP. Micro, small and medium-sized enterprises (MSMEs) are in dire straits. They aren’t earning any revenues and have no way to pay employees. With a lockdown in place, those who own these businesses dare not venture out, neither do their customers.

With zero revenues, these businesses can’t afford to pay employees leading to a vicious cycle where employees cannot buy goods and services produced by other companies, including MSMEs. This cascades through the economy wreaking havoc on businesses. The most vulnerable companies to be affected by this tend to be small and medium-sized ones.

There is an Economical Full-Stop in Place

The full extent of the harm, both human and economical, caused by the COVID-19 pandemic will be more apparent in a few weeks, and perhaps a bit longer. For the time being, people are remaining in their homes and venturing outside only to procure essential items. Economic activity has come to a halt. This has never happened before. There is talk of restarting the economy once the crisis passes, yet even the best economists’ state that it won’t be as easy as turning on a switch. What happens after an economic full-stop, nobody knows.

MSMEs in India are facing tremendous uncertainty. With a halt in economic activity, their working capital is lying unused. A significant proportion of such businesses have taken working capital loans from banks and have to pay them on time with interest. With all economic activity coming to a standstill, the working capital loans MSME businesses have taken are lying unutilised. Companies can’t use their working capital loans for the benefit of their business, yet they have to repay on time.

There are other challenges, as well.

Invoking Force Majeure

Most MSMEs work with just 1 or 2 months of cash flow. When they don’t earn during this period, they exhaust their cash supplies and cannot pay employees and suppliers. This has grave consequences for the economy. MSMEs heavily rely on each other as suppliers and customers. In today’s climate, many are invoking force majeure to save their businesses. By invoking force majeure, companies don’t have to pay their suppliers. The invocation of force majeure by lakhs of MSMEs will ripple across the economy and produce more economic devastation than can be imagined. While it is a given that economic activity has come to a halt, when businesses use force majeure as protection against liabilities, entire industries suffer.

The clause force majeure exists for a good reason, and the time is right to invoke it. Yet, the scope of the full economic stop means that every industry, not just a few, will be impacted when force majeure is invoked. This is something that has never happened before.

The Government is acting swiftly

Governments across the world are responding to save lives and livelihoods. In India, Europe, and the US enormous packages have been announced. A month ago in India, the Government announced a nearly USD 23 billion aid package. According to the terms of the package, capital would be directly transferred to millions of poor to buy food.

The most recent aid package is of approximately $13 billion and will help MSMEs weather the current economic storm. The new package will increase the amount of loan MSMEs can take as working capital. The package will also increase the tax exemption threshold, so MSMEs pay less tax. There will also be a relaxation in how much income tax MSMEs must deposit and relaxation in the depositing of other dues.

Time will tell whether the aid packages are sufficient to prevent many MSMEs from capitulating. For the time being, most MSMEs are in a tight spot, yet it is heartening to see governments across the world, responding to the crisis. In all probability, the worst will be averted.

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