MSMEs are being killed by the Covid-19 pandemic

MSMEs saw a 10.5 percentage point drop in the ratio between the second and fourth quarters of 2020

By Jaiveer Shekhawat,

Small businesses may be the bedrock of the Indian economy, helping expand its industrial base and creating jobs by the millions, but the pandemic has shown it’s better to be bigger, according to research by Societe Generale.

The so-called micro-, small-, and medium-enterprises haven’t benefitted much from the government’s stimulus steps such as liquidity and loan moratorium, forcing them to let go a large swathe of their employees, Kunal Kundu, an economist with Societe Generale GSC Pvt. in Bengaluru, wrote in the report. While the bigger companies sailed through with a minor blip, he said.

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Given that small enterprises account for more than 110 million workers and are the nation’s biggest non-farm employer, Kundu said their revival is key to getting jobs on track, and, in turn, domestic demand.

Here’s how Kundu sees small companies faring poorly compared to larger ones:

MSMEs, which have a much higher staff cost-to-sales ratio, saw a 10.5 percentage point drop in the ratio between the second and fourth quarters of 2020, while the drop for the larger companies was only around 5 percentage point.

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Despite large-scale layoffs, MSME’s margins continued to suffer not just because of high and rising input costs, but also because of a sharp increase in their financing cost.

Small businesses also face a double whammy on the tax front. Currently, these businesses are liable to pay consumption tax as soon as they raise an invoice, irrespective of whether or not the invoices have been settled. Failure to pay goods and services tax, in turn, leads to an additional burden in the form of penalties.