• Vivek Agarwal, Partner |

As the world braces itself to counter the spread of COVID-19, its impact will be felt on all sections of the Indian economy, not just in the immediate term but also over the short to medium term. All India Manufacturer’s Organisation (AIMO) forecasts[1] that about a quarter of over 75 million MSMEs in India will face closure if the lockdown is extended beyond four weeks. This figure is expected to touch a whopping 43 per cent if the situation extends beyond eight weeks. The impact will be high considering the fact that these MSMEs provide employment to over 110 million people and contribute 30 to 35 per cent to the GDP[2].

MSMEs are affected at several levels - with the lockdown across the country, retail has been hit big time. Entities engaged in the hotel industry, tourism sector and logistics are witnessing a sharp drop in business. The e-commerce segment is partly operational; however, it is unlikely to remain immune from the prevailing sentiment and purchasing capacity. Moreover, the impact on businesses will have a cascading effect across the value chain. The consumer goods segment (garments, footwear, utensils etc.) and automotive segments will see a major decline due to decreased demand. Sectors that are dependent on high imports (of raw material) such as electronics, consumer durables, pharms marble are facing bottlenecks and so are the export focused sectors due to a major drop in demand globally. The RBI’s announcement of a three-month moratorium on repayment of term loans and a reduction in the repo rate will provide some relief.

The following short-term and immediate measures are being suggested by KPMG to help the MSMEs stay afloat. Conservatively speaking, the short-term impact will spread over the first quarter of the financial year 2021, some of which will also reflect in the current quarter of 2020.

Measures to address the liquidity crunch

  • There is a severe disruption in demand and payment cycles leading to challenges in terms of the capacity to repay loans in a timely manner by MSMEs. The payment of installments of loans, both personal and business, should be deferred by a few months without the levy of any penalty
  • Several states have announced lockdown and this is likely to get extended to others leading to complete shutdown of production. The salaries/wages of workers during the period of shutdown and slowdown will become a huge liability for MSMEs. During shutdown, salaries/wages could be paid through Employees' State Insurance Corporation (ESIC) or there should be an assistance from the government towards the payouts
  • The Trade Receivable Discounting System (TReDS) should be made effective and all pending payments should be immediately cleared.

Relaxation with respect to fiscal and regulatory compliances

  • The date to deposit advance tax should be extended by six months
  • Businesses are subject to a lot of inspections and physical audits by local bodies and regulatory institutions. Such inspections and any prosecution arising out of these should be withheld till the epidemic is under control
  • All GST and other tax refunds should be credited to the businesses immediately to tide over the lack of fund availability with the enterprises
  • Delivery of all imports is being allowed after a cooling period of 14 days for the cargo. In view of this restriction, the government could consider waiving off the demurrage and shipping charges imposed on the importers. 

Credit support

  • Increasing the open cash credit (OCC) account limits for MSMEs by 20 per cent would have a positive impact on the liquidity available with these businesses. This limit could be reviewed on a monthly basis and revised as per the prevailing situation
  • Banks may be directed to provide funds to ease out the monthly expenses related to utilities, paying of wages, etc.
  • Banks may be asked to substantially ease the margin requirements and make stocks and receivables totally fungible for security purposes
  • State Bank of India has introduced an emergency line of credit for businesses impacted by COVID-19 and this is specifically aimed at aiding MSMEs. Other banks should be encouraged to take similar measures with lower/flat interest rates, higher moratorium period, ease of sanction and flexible repayment schedules
  • The financial cycle of exports is longer and, hence, the credit period on export sales should be extended.

While the above measures are more immediate in nature, it will be vital to initiate measures which focus on boosting domestic production, stabilising domestic demand and encouraging exports in a more targeted and timebound manner.

[1] MSMEs will be the biggest casualty of COVID- 19 in India: a Study, The Hindu, 16th March 2020

[2]  As per 73rd round of National Sample Survey conducted by NSSO