As many businesses shut and individuals stayed home, the demand for goods and services suddenly plummeted, contributing to growing unemployment and work stoppages.
Even where a partial economic recovery began in the second half of 2020, the GDP for the year was -7.97%. However, for the year 2021, the GDP is set to rise to 12.55%.
The MSME sector has been conflicted with several challenges in the past, but COVID-19 led lockdowns have left it in shambles. The second wave of the pandemic further exposed vulnerabilities and cracks like never before. Exposed to delayed payments, high informality, and low financial resilience, shockwaves were felt by the MSME sector throughout the pandemic.
MSME sector faced the most brutal hit
No business sector has been more shaken as compared to the MSMEs. MSMEs are more vulnerable to economic shocks as they tend to have few assets and limited cash reserves than larger enterprises, as well as relatively low levels of productivity. Small businesses also employ more than 60% of all workers in APEC and make up over 90% of all enterprises in most APEC economies.
Some MSMEs have been forced to shut their businesses and lay off employees, while many others face difficulty maintaining a positive cash flow.
The major pain points during lockdown were:
1: Labor shortages
2: Lack of raw materials
3: Weak consumer demand
4: Significant stress on cash flow
5: Several issues that many MSME owners respondents fear will impact their businesses are:
Prolonged global recession
Surges in bankruptcies and industry consolidations
Protracted disruption of global supply chains.
Significant Challenges faced by MSME
Micro, small, and medium-sized enterprises (MSMEs) industry forms the backbone of our economy. Due to COVID-19, many businesses struggle to survive these challenging times; they face new hardships every day and lack liquidity.
As per the report of the Working Group on Micro, Small, and Medium Enterprises (MSMEs), the MSME sector contributes 30% of India's GDP, and the estimated number of workers in unincorporated non-agricultural MSME is 11 crore.
Some of the challenges faced by the MSME sector during the pandemic are:
1. Lack of access to technology
The lack of access to modern technologies, infrastructure, and finance is prominently on the long list of challenges. Employing more than 117 million people across 51 million enterprises, the MSME sector is viewed as a significant contributor to economic growth and recognized as the backbone of the Indian economy. Government measures are geared towards increasing MSMEs' competitiveness, including creating awareness of Intellectual Property Rights, aiding entrepreneurial and managerial progress employing incubators and digital empowerment initiatives. 2.
2. Freeze in external funding
Lockdown, interruption in production, and supply chain have led to a sharp fall in the business and operational difficulties for many MSME owners. They have to take care of their legal obligations, daily wages, and many other tasks, including funding.
3. Challenge of Payment Delays
Given India's weak contract enforcement environment and the asymmetric power relationship between the buyer and the MSME supplier, MSMEs struggle to realize their receivables in a time-bound manner. Delayed payments are an endemic feature of the Indian economy. Delayed payments often push these MSME owners into a debt trap, sickness, and even failure.
The payment scoring mechanism, innovative & strategic approaches to provide methodical access to the invoice financing mechanisms such as the TReDS platform, and subsequently adopting the online dispute resolution platforms could help solve the delayed payments problem.
4. MSME Digitisation and Capacity Building
From small departmental stores adapting to take orders over WhatsApp to greater adoption of digital payments, the COVID-19 crisis has acted as an inflection point in the digitization journey of MSMEs. This momentum can soon be capitalized on to develop digital solutions to some of the most urgent needs for the MSME sector.
5. Online tools
Many online tools that support skilling and capacity building for micro-enterprises, platforms looking to become an online bridge to help MSMEs access government schemes, facilitate demand discovery, and help solve the hiring challenge, can help supercharge the productivity in the MSME sector.
The economic and financial problem of MSMEs in India is unprecedented. It threatens their very existence simply because the extent of damage inflicted on MSMEs due to supply and demand shocks have turned out to be far in excess of what has been anticipated, and it is still evolving.