India’s MSME Sector: Recovery On The Cards But Without Any Festive Cheer

by Vibhuti Mittal and Tushar Gupta - Oct 14, 2021 01:49 PM +05:30 IST
India’s MSME Sector: Recovery On The Cards But Without Any Festive CheerFestive shopping.
  • For India’s MSME sector, Diwali is the annual make-or-break period. But due to the Covid restrictions, the recovery has been hindered to some extent.

    While this does not threaten the long-term recovery of the industries, going forward, it does add a bit of sourness to a month that is usually sweet on revenues and profits.

In the last seven years, the comprehensive entrepreneurial environment of India has gained tremendous support from its ruling government. Policy initiatives of the Narendra Modi government like Make In India, Skill Development India, MUDRA Bank, Digital India, Startup India, and now ‘Aatmanirbhar Bharat’ are a few of the vital determinants of the upgradation of the Indian entrepreneurial ecosystem.

In the recent past, the micro, small and medium enterprises (MSME) sector, also known as the growth engine of the Indian economy, has witnessed three macroeconomic events concerning its operation and survival. Demonetisation, goods and services tax (GST) implementation, and the black swan Covid-19 pandemic.

The demonetisation specifically targeted the black money circulation in the country, and GST implementation led to much needed large-scale formalisation of the sector. While both demonetisation and GST registrations significantly contributed in regulating shadow operations of unorganised and informal small businesses, Covid-19 pandemic has caused enough financial vulnerability to each of them.

The country is slowly and steadily crawling out of the adversities and jolt of the second wave. While the manufacturers and traders are preparing for festival season to kick in, the fear of the third wave and market uncertainties is instilled in the small business owners.

However, one can assume that the fear is a matter of a few more months. Still, the strong market uncertainties due to pandemic, extended lockdowns, and repercussions are hard on the non-farming priority sector.

The priority sector of MSMEs — micro and small enterprises, wholesalers and retailers are willing to run along with the V-shaped economic recovery but are facing severe hindrances due to prevailing market conditions.

Raghav Sharma, a stationery wholesaler, based in Daryaganj, Delhi, has witnessed a tough time since Covid-19 knocked on our doors. "Not only our customer footfall has drastically declined, but people are also moving on to e-commerce sites for their stationery needs." The sheer dependence of students on the online mode of education has significantly reduced sales turnover and market size of the stationery bazaar.

The same misery is extended to the school uniform manufacturers and retailers. Goel and Sons, who had a tie-up with public schools of a specific area of North Delhi, has now shifted to other modes of earning.

"The factory workers did not show up after the first wave, and the possibilities of school reopening in the present academic year seems gloomy as well. So, meanwhile, I have started a grocery retail shop and rented half of our workspace to another business," said owner of Goel and Sons. His concerns are further extended to the stock of school uniforms lying in his godown. "In Feb-March 2020, we manufactured it in bulk, given the new academic session of school kids, but the consignment lies in our basement becoming our liability."

The Indian micro enterprises sector is well connected and highly associated with the bigger fishes. Radhey Shyam Verma owns a papad manufacturing business and supplies to retailers, hotels and restaurants. When we inquired about his post-second wave business experience, he called it a break-even situation. "We are managing; the hopes are very high for October, if we manage to complete our sales target, it will balance our working capital cycle". Talking about the speculations of the third wave, Verma shared, "The first and foremost worry is about the perishable nature of our food products; if we produce less, we lose the market opportunities, if we produce more, the risk is too high to bear".

Struggling through the Delhi government’s firecracker ban, Tony Bansal, a small shop retailer, is facing difficulties to meet his capital expenditure. "We usually borrow our stock of firecrackers in the summers and pay our creditors at the end of Diwali-season; the interest on our dues is another headache."

When enquired about every year’s firecracker ban of AAP’s administration, Bansal expressed disbelief over the another ban. "Diwali used to be our best bet in the whole year to earn gains over the year-long investment, it is rather cruel that the pollution is entirely blamed on the crackers. Owing to last year’s unprecedented ban, we had stocked green firecrackers to get some relief in restrictions."

The litany of financial miseries and market threats in the face of fallen aggregate demand have hampered the ease of doing business for micro-entrepreneurs. Rajesh Chauhan, who is a marble flooring tile seller in Mayapuri, Delhi, is a little riled up about the unusual dramatic events. "The second wave disturbed our business cycle for the time it lasted, but we are equally concerned about the imposition of sudden decisions on us. The rise in AQI leads to a rise in our blood pressure; the instantaneous halt on construction activities is the worst which can be done to us now."

Discussing the labour crisis, Sunil Walia had an interesting take on reverse migration. "Hiring a worker in the present times is a cumbersome and expensive process. The reverse migration, free food to all, and employment opportunities in the neighbouring states, especially in Uttar Pradesh, has made it difficult for us to employ workers on the previous rates and terms."

The surge in fuel prices is further causing financial distress to MSMEs. The excessive hike is disrupting transportation and logistics for a small business entity. The working capital cycle is also witnessing disturbance due to unreasonable hikes in raw material costs, especially in oil-based products such as synthetic yarn. According to a socks and stockings manufacturer from Shastri Nagar, Delhi, "The cost of production has significantly increased due to rise in prices of synthetic yarn, and since retail customers are not willing to pay the right price for our finished goods, we have to currently operate on break-even".

India’s MSME sector is on the verge of attaining the pre-Covid levels, but several sectors continue to struggle, especially the ones pertaining to the clientele studying in schools, colleges, or working in offices. The precious metal sector is also reeling under the threat of an imminent third wave, thus denting the festive spending.

Turns out, there is always an economic cost and bundle of market opportunities which are associated with the festival season in India, especially during the month of October. One unexplained or unprecedented order from the over-enthusiastic authorities has the potential to usher enough financial miseries to people and businesses.

For India’s MSME sector, Diwali is the annual make-or-break period, in many parts of North India, due to the unforeseen Covid restrictions imposed, the recovery has been hindered to some extent as the festive splurge has been dented. While this does not threaten the long-term recovery of the industries, going forward, it does add a bit of sourness to a month that is usually sweet on revenues and profits.

Recovery on the cards, but with dented spirits.

Dr. Vibhuti Mittal is an author and academician from New Delhi. Her research area is dedicated to Entrepreneurial Finance, Priority Sector Lending, and Behavioural Economics.

Tushar Gupta is a senior editor at Swarajya. He tweets at @Tushar15_

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