The exponential growth of Coronavirus across the world and its detrimental effect on the world economy is evident and profound. Policymakers, apart from fighting this disease, are looking for ways to mitigate its economic impact. The conundrum, however, is the payoff of containing this disease. At the cost of slowing down the economic activities, we need to adhere to social distancing and reduced mobility, which have emerged as the best way for its containment.
The Indian government has been proactive in the fight against COVID-19. On the economic front, it has announced a slew of measures to reduce the shock waves including a package of Rs 1.70 lakh crores for farmers, women, and poor sections of society.
The Confederation of Indian Industry (CII) is also working relentlessly to assist the government, industry, and society to tide over this pandemic and keep socio-economic conditions optimal under these circumstances. CII has formed a COVID-19 Forum to work out sectoral strategies and recommendations aimed at minimising the impact of the outbreak in the severely affected sectors.
The Micro, Small and Medium Enterprises (MSME) sector, core to India’s industrial structure, has been among the worst-hit sectors. A critical sector, it needs the utmost attention. CII, with a large membership base from the MSME sector, has been assessing the impact of COVID-19 and has suggested measures to reduce the impact. The COVID-19 forum recently announced setting up of a CII COVID Rehabilitation and Relief Fund (CRR) to aid the ailing MSME sector. The CII National MSME Council is in touch with the MSME members, and constant deliberations are yielding some possible solutions for the sector’s recovery.
CII has identified key areas that are disrupting the MSME sector viz. disruptions in cash flows, wage bills and payments, and inventory management, among others. It has drafted recommendations in two key areas which are, cash flow and working capital, and welfare measure, that could safeguard the sector.
Cash Flow and Working Capital
Coronavirus has halted the production cycle, disrupted the supply chain, and impacted inventories. This, in turn, has hurt the cash flow and working capital of the MSME sector. In such a scenario, CII has recommended an additional ad-hoc sanction of the working capital to the tune of 25% of the current sanctioned limit. CII has urged the government to defer EMIs, installments, and term liabilities without affecting their credit rating and any adverse action on them resulting from the delays.
It has suggested to set up a special MSME Factor Fund for faster realization of bills, creation of a corpus, and extension of NPA norms to 180 days from current 90 days in genuine cases, among many other provisions to restore the cash flow across the MSME sector. To ease the liquidity crunch, banks could extend the credit limit by 20% at branch level, and may also allow an extension of 25% of the sanctioned limits on SOS basis.
Additionally, CII has prescribed faster payment of dues by the larger companies, the public sector, and Government Departments, and to have a monitoring system at place to check the delays.
The MSME sector is the second-largest employer in India, besides agriculture. Therefore, CII believes that the government should intervene to provide much-needed relaxation to both the workers and the sector.
Creation of a corpus for paying wages during the compulsory shutdown, partly compensating the workers through the Employee State Insurance Corporation (ESIC), and supporting laid-off workers till normal operations resume are some of the measures to support the sector.
The government could also ease compliance by giving 90 days extension for the employer’s contribution to the state insurance. An additional approach for the welfare of the workers could be explored by allowing CSR funds to support the payment of wages. The government could also consider a wage subsidy to the extent of 50%, especially in the manufacturing sector for all registered workers, for nine months.
The recovery of the MSME sector depends on the areas of its operation. While the services sector might take a month or two to bounce back, the manufacturing sector might take up to a year, depending on its profitability.
CII believes that a contingency plan divided into three periods viz. till 31 March, 1 April to 31 May, and 1 June to 31 July could give a prudent bandwidth to deal with the MSME scenario. With corrective measures in place and a positive outlook, the impact of Coronavirus-related shutdown on small enterprises could be mitigated.