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Small businesses have been hit the most by the spread of covid-19, data from CARE Ratings confirms.
Small businesses have been hit the most by the spread of covid-19, data from CARE Ratings confirms.

Small businesses faced the wrath of the pandemic

Small businesses have been hit the most by the spread of covid-19, data from CARE Ratings confirms. Listed companies with sales of less than 25 crore recorded the sharpest contraction in sales of around 67% from April to June 2020. What lies behind this? Mint takes a look.

Small businesses have been hit the most by the spread of covid-19, data from CARE Ratings confirms. Listed companies with sales of less than 25 crore recorded the sharpest contraction in sales of around 67% from April to June 2020. What lies behind this? Mint takes a look.

What does size-wise analysis of firms say?

Economist Sushant Hede of CARE Ratings analyzed the earnings of a total of 1,686 companies. Among them, 747 firms had net sales of less than 25 crore in April-June 2020. These companies saw their sales decline by 66.7% between April to June this year, in comparison to the same period in 2019. In fact, a look at the accompanying chart shows that clearly there is a negative relationship between the size of a company, as represented by its net sales and the fall in sales between April and June. In fact, companies with net sales of more than 500 crore saw the least contraction in net sales at 22.4%.

Why have small firms been hit the most?

This is a trend that has played out all across the world. In a June report, the consultant McKinsey said: “Some small businesses may close because they’re in industries such as accommodations, food educational services, that are affected by changing customer behaviour, especially physical distancing." And some other small businesses closed down as they were already in a weak financial position before the crisis started. In fact, research carried out by the US Federal Reserve suggests that “only 35% of small businesses were healthy at the end of 2019." Of course, this was in an American context.

Inversely proportional
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Inversely proportional

What are the reasons for small Indian firms failing?

Many small businesses, especially in the listed space, are part of supply chains that feed into bigger companies. Due to regulatory restrictions and the lack of a clear distinction between what is essential and what is not, many supply chains broke down, resulting in a fall in production and hence, lower net sales for small businesses, with a size of less than 100 crore.

Are there any other reasons for this?

Many small companies employ contract labour. Due to the spread of covid-19 and the lockdown, people working on a contractual basis either chose to or were forced to move away from the country’s key manufacturing hubs back to their homes, in the eastern part of the country. This impacted production of small businesses. Also, many small firms feed into big companies. As the demand for products made by bigger companies collapsed, they cancelled orders, leading to a drop in sales for small businesses.

Is the business model of small firms at fault?

Unlike many large companies, which make final products for sale to the end-consumer, smaller businesses are more into making intermediate products that go into the making of final products. Hence, smaller businesses tend to typically depend more on orders from a few large companies, in comparison to larger businesses that are significantly more diversified. Given this, in any economic crisis, they are likely to get hit more.

Vivek Kaul is the author of Bad Money.

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