Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

Opinion | India’s most vulnerable enterprises need the most help

The Chinese effort to save its Covid-struck small and medium firms could hold lessons for India

Even as the World Health Organization has declared Covid-19 a pandemic, identifying vulnerable populations most susceptible to the virus and providing health advisories, the moot question is which part of the economy is the most vulnerable to the tiny virus? The answer, unsurprisingly, is the micro small and medium enterprise (MSME) sector, which is battered and bruised enough in the aftermath of the economic transformation sought to be achieved over the past three or four years.

In this context, it might be worthwhile to look at a study of 995 small and medium enterprises (SMEs) in the Wuhan region conducted jointly by Tsinghua and Peking Universities (bit.ly/3acIh13) at the end of February. Survival in the face of disrupted cash flows could be a major issue for the SME sector during the pandemic. More than one-third of these enterprises stated that on current cash flows, they could survive only one month, and less than 10% could survive for more than six months. Business expectations are at a nadir. About 30% of the enterprises expected their operating income to decline by more than 50%, while about 58% expected their operating income to decline by more than 20% in 2020 due to the epidemic. Most of the expenditure pressure is reported to stem from outflows on salaries, insurance and pensions, rent payments and loan repayments, in that order.

The response and reaction of SMEs to the pandemic is what is worrying; 22.4% of them plan to reduce staff and pay, while 16% chose to stop production and go out of business. It turns out that government and institutional support can mitigate some of these concerns. These could take the form of government subsidies to absorb and reduce the cost of social security, rent, employee salary and other costs, plus liquidity support, as also a reduction in taxes and fees.

A scenario analysis for China reveals an optimistic scenario of epidemic control within two-three months and an intermediate scenario lasting between six months to a year. The bad news is that in case the epidemic survives more than half a year, 90% of these companies would be unable to survive and would go bankrupt.

While we are conducting a similar survey in India, China’s response to the pandemic holds lessons for us. China has followed a multi-pronged approach, with efforts being made at both centralized and a decentralized levels. On one hand, the Chinese government and central bank have responded jointly to Covid-19 through generalized as well as directed monetary support and incentives. The Chinese central bank, the People’s Bank of China (PBOC) provided a major monetary stimulus worth $245 billion in February 2020, cutting interest rates and lowering bank reserve requirements, thereby impacting fund availability, as also borrowing rates. To ensure the transmission of its monetary stimulus, regional banks are being incentivized to pass on such lower rates to borrowers, especially SMEs. Further, the government has allocated $15.9 billion to fight Covid-19 in the form of support and guarantees to the local governments affected the most. The State Council, its government cabinet, has asked private commercial banks to provide relief to SMEs experiencing cash flow difficulties by postponing interest payments on loans till end June, as also by deferring repayments of principal for the time being. It has also ordered large state-owned banks to increase lending to small businesses by at least 30% in the first half of 2020, while the three government-run policy banks have also been told to lend $49.7 billion to small businesses at preferential rates. Tax and fees for industries heavily impacted by the epidemic have been lowered to alleviate the social security burdens on employers.

On the other hand, a slew of non-financial measures to support SMEs with epidemic control, in addition to a balanced reopening of businesses, have also been put into place. Covid-19 prevention readiness has become an important principle for reopening, with local governments monitoring as well as supporting SMEs in their disease-prevention readiness. Businesses that are relevant to the local economy are being allowed to resume work and production first to prioritize and control the epidemic, with such monitoring being done by local governments.

India must draw a leaf out of China’s book. While the health of people is of utmost importance, and lockdowns mean that most offices must work from home, what of India’s MSME sector? The shutdowns now in place will have direct and indirect effects on the economy and employment, but while large companies will mostly survive, such shutdowns may act as a death-knell for smaller ones. Focused government programmes aimed at the MSME sector are imperative, and a good mix of monetary and fiscal policy measures is needed. The government should consider hard measures such as easier lending policies, lower interest rates, deferred taxes and fees and additional funds for MSMEs to help them stay in business to the extent possible and keep workers employed. At the same time, soft measures should be adopted to help SMEs with online marketing. Special subsidies for them to house and/or transport workers safely may be envisaged, too.

The battle against Covid-19 is as much an economic battle as a health emergency. There is an urgent need for India to identify the economically vulnerable right away and support their survival.

Tulsi Jayakumar is professor of economics and chairperson, Family Managed Business, at SP Jain Institute of Management and Research (SPJIMR), Mumbai

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