MSME Ministry Study Confirms Lockdown Battered Small Businesses in India

The lockdown came after demonetisation and a botched implementation of GST had already worsened the economy.

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For years now, a small section of economists, and most recently Congress leader Rahul Gandhi, have contended that the Micro, Small and Medium Enterprises ecosystem in India has faced widespread devastation thanks to a number of ill-deliberated initiatives of the Narendra Modi government, namely, demonetisation, ham-handed implementation of the Goods and Services Tax and the COVID-19 lockdowns.

Now, evidence has emerged that the lockdowns imposed during the pandemic pummelled the MSME sector. Much to the embarrassment of the Bharatiya Janata Party government, this data does not originate from a third-party, independent economic research organisation or a think-tank, but from a study conducted on the orders of the MSME ministry.

The study, done by Small Industries Development Bank of India (SIDBI), sampled 1,029 MSMEs spread across the 20 states and two Union territories. SIDBI was directed to assess the impact of change in MSME classification on the sector. The terms of reference of the study inter-alia also included an assessment of losses suffered by the MSME sector due to the COVID-19 pandemic.

The report of the study submitted on January 27, 2022, reveals that 67% of the respondent MSMEs were temporarily closed for up to a period of three months and more than 50% of the respondent units witnessed a decline of more than 25% in their revenues during the FY 2020-21.

Around 66% of the respondents reported a decline in profitability on account of stable fixed costs and a decline in revenue.

The gravity of the damage because of the lockdowns in the MSME sector can be assessed by the large number of respondents who had to resort to tapping the government’s emergency credit schemes.

Also read: Why India’s MSME Sector Needs More Than a Leg-Up

The study reveals that around 65% of the MSMEs surveyed, have availed the benefits under Emergency Credit Line Guarantee Scheme and around 36% of respondents also availed loans under the Credit Guarantee Fund Trust for Micro and Small Enterprises scheme.

Lurching from crisis to crisis

Tough times began for the MSME sector when Prime Minister Narendra Modi on November 8, 2016, demonetised all Rs 500 and Rs 1,000 currency notes in one fell stroke. This sucked out the liquidity out of the economy and put millions of small and vulnerable MSMEs out of business.

The demonetisation shock also rendered close to three crore people jobless while delivering a body blow to the unorganised sector, which houses a substantial portion of the MSMEs in India.

This was followed by a botched implementation of GST.

The architectural framework of the GST is tilted in favour of the formal sector and the informal or the unorganised sector was decimated as there was no hand-holding or business relief from the government.

Additionally, units in the unorganised sector were not adequately equipped to fruitfully and meaningfully engage with the modalities of input tax credit, which effectively put an end to business flowing from formal units to small informal units. Subsequently, business stopped flowing from formal units to small informal units and shifted to other formal units that were capable of providing and accommodating the modalities of input tax credit in their operations.

After being put through the twin shock of demonetisation and GST, the economy responded by retreating into a spell of slowdown marked by subdued consumption, widespread job losses and growing demand for MNREGA work.

Just when one thought that things couldn’t get any worse, the pandemic surfaced, and with it came the lockdown.

The first lockdown presaged unprecedented destruction of economic activity in the country halting not only sales and earnings for MSMEs in India but also engendering a humanitarian disaster in the form of thousands of migrant workers helplessly shifting out of cities and industrial hubs. Currently, 45% of the total economic output stems from the unorganised and the SME sector. Its revival is key for consumption to recover to its pre-pandemic levels and for broad-based economic growth.