Pandemic impact on Micro Enterprises: A case study of Sawada Ghevra, New Delhi
To try and prevent the spread of COVID-19, the Indian government imposed a nationwide lockdown on 24 March. While the national lockdown ended on May 31, the localized lockdowns since then, continue in varying parts of India. This virus has posed quite a serious threat to the global economy as well as Indian economy with certainty upon the fact that the Medium, Small and Micro Enterprises (MSMEs) will be taking a maximum hit in India. According to a study commissioned by All India Manufacturers Organization (AIM0), India is currently home to over 63.3 million MSMEs. It was anticipated that close to 25 percent of these firms will face closure, if the lockdown imposed due to the COVID-19 goes beyond four weeks while a whopping 43 percent would close if lockdown extends beyond eight weeks. With no clear data on the number of Micro, Small and Medium Enterprises (MSMEs) that have faced closure during the lockdown period from the government (June 2020, Minister of State for MSMEs) the ambiguous situation poses a difficulty in trying to come up with MSMEs support policies. Following the end of national lockdown, almost nine out of every ten of India’s MSMEs restarted operations with 85% of MSME units operate from households. With limited exposure to formal banking, they are not able to take the benefit of the Centre’s liquidity package, which is linked to outstanding bank credit.
MSME sector is considered as a backbone of the Indian economy and it is one of the integral sectors that help the economy grow, but considering the past trends, it is a known fact that MSME sector has faced one setback after another, first being demonetization, followed by poorly implemented GST, the economic slowdown and then the financial and banking crisis. Now, the biggest of all, the COVID-19 is feared to aggravate the crisis in this specific sector further, the sector which provides employment around 11.1 crore people (about 30% of Indian's labour force) and contributes to more than 30 percent of the GDP is going through one of the toughest phases.
Understanding the MSMS’s sector in India
Definition: Initially, MSMEs are defined in terms of investment in plant and machinery, but this criterion for the definition has long been criticized due to unavailability of credible and precise details of investments by the authorities. In February 2018, the Union Cabinet decided to change the criterion to “annual turnover”, which was more in line with the imposition of GST. The newly proposed definition is yet to be formally accepted. (refer the tables below for the definition criteria.)
Current status: According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country. Around 49 percent of these are situated in urban area. Together, they employ around 11.1 crore people out of which 55 percent of the employment happens in the urban MSMEs. It also accounts for a third of India’s manufacturing output and 45% of exports.
These numbers suggest that, on average, less than two people are employed per MSME. At one level that gives a picture of how small these really are. But a breakup of all MSMEs into micro, small and medium categories is even more revealing. Table below shows, 99.5 per cent of all MSMEs fall in the micro category. While micro enterprises are equally distributed over rural and urban India, small and medium ones are predominantly in urban India. In other words, micro enterprises essentially refer to a single man or a woman working on their own from their home. The medium and small enterprises — that is, the remaining 0.5% of all MSMEs — employ the remaining 5 crore-odd employees. 
Finance: In spite of accounting for 30% of Indian’s GDP, the share of MSMEs in total outstanding bank credit in 2017-18 was just 6.3%. According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (about 11 lakh crore Indian Rupees) of the credit MSME need that it can potentially fund against the credit demand of 36.7 lakh crore, which shows the credit gap of 25.6 lakh crore.5
A key reason of why banks hesitate to provide the loans to MSMEs sectors is, the high ratio of bad loans, data show higher slippage for relatively bigger enterprises. Another reason is most of the MSME/s are not registered as companies, as most of them are single-person proprietorships.
Understanding the effect of pandemic on ME: Case of Sawada
Savda Ghevra, a resettlement colony established by the Government of Delhi in 2007, at the city’s northwest edge, has provided a marginal civic experience to nearly 8000 families. Families relocated from inner city slums were given small plots of 12 sq. m. or 18 sq. m. Centre for Urban and Regional Excellence (CURE) started working with the people of Savda Ghevra in 2008, in partnership with the Government of Delhi under its ‘Bhagidari’ program, to help resettle the relocated households - improve access to basic services and transfer of health, education and social welfare benefits. For micro enterprises, the strategy spanned up-skilling, financing, resourcing, formalizing, marketing, sales and management. Over the two phases of the project, 15 micro enterprises were set up - many continue successful; expanding businesses and reinvesting profits into better equipment.
To measure the impact of lockdown and the post lockdown challenges faced by existing micro enterprises, six micro enterprises groups were contacted and interviewed upon the challenges they are facing along with their expectations and plans for the revival of their businesses post the lockdown phase. The interview was carried out by us telephonically and included enterprises engaged in the stitching of hospital garments & others products, carry bag making, spices, furniture, waste collection and broom making groups.
The overall results of the interviews indicated that all the businesses related to manufacturing products faced severe loss since it was brought to a complete halt during lockdown phase except DTD waste collection system which also dropped by two third of their households. Daily wage workers involved in business like stitching, carry bag making, furniture have slowly returned to their hometowns but a lot of them are still struggling with the unavailability of labour even after the lockdown has been lifted. Also, the availability and movement of raw materials that had completely stopped due to lockdown, has resulted in major setback and losses for these enterprise groups.
The above chart clearly reflects that during lockdown phase, the business of five group had totally stopped, which were potentially earning enough money to run the business smoothly before the current crisis. Due to no turnover in the lockdown months, few of them were even unsure, with the pandemic still spreading, on how they can run their business the same way as it was before the lockdown. This shows that it is very hard for smaller enterprises to recover and restart the business, once it’s disrupted. Owner of a stitching business Khurshid mentioned that “these kinds of small businesses run usually with earnings covering the expenses on a month-to-month basis, with little reserves for the future. A disturbance like this might just mean restarting everything”.
Business groups like stitching and carry bag groups, hire workers on per piece basis and furniture groups pay their labour per day basic. The owner of the group fully handles the marketing, supply and selling part. As government implemented the lockdown without giving any prior indication, these group did not get time to supply the manufactured products to the vendor. Initially, group owners thought government will allow transportation after 7-10 days of lockdown, therefore they confidently had paid the salary/wages to their labours, which was a good thing. But afterwards these group didn’t have the capital cost to start to business again and they could not afford the other associated cost like electricity bill, room rent etc. for 2-3 more months.
Sunita one of the members of the spice group said that they were already experiencing decline in business before the lockdown started, due to cancellation of orders, furthermore, the sellers are also hesitant to buy their product due to hygiene reason. These groups are afraid that the situation would not be the same as it was earlier for long. People are preferring to buy branded products in fear for hygiene and this has been badly affecting their business. Most of their product sale relies upon the weekly markets and due to the new norms like social distancing etc. people are avoiding visiting these places.
When it was asked about taking precautions suggested under COVID, Khurshid owner of stitching group shared his worry in maintaining social distance inside the stitching unit, as the size of the room is very small and he can’t afford another room. He is also concerned since the virus will be not going to end soon and the raw material come from Nizamuddin area, so there is always a risk of getting infected by the virus. It reflects that Strict rules for social distancing after lifting the lockdown are not viable for these kind of manufacturing units in Sawada or it would cost more money for these already suffering groups.
DTD group member Raju said that he had lost 75% of the houses where he was collecting the waste, because most of the Galis (local lanes) were locked. Vimla the other member of DTD group very sadly mentioned that her four year of work is vanished within a month.
It clearly understandable that these groups lack the capital cost to restart their business again. Their other big issue is many of these are too small and are not registered anywhere, due to which they can’t apply for the formal loan. They don’t even qualify the GST criteria. Being out of the formal network, they do not have to maintain accounts, pay taxes or follow to regulatory norms etc. This brings down their costs. But, as it is clear in a time of crisis, it also constrains a government’s ability to help them. So, without being mapped, they don’t qualify for any relief schemes and can’t apply for formal loan. To restart the business these group will require to lend money from some other source. They have two options available, either they can lend the money from livelihood revolving fund (LRF), or some other informal source. But their biggest hope is LRF, which is established by the CURE project money to provide the interest free loan to needy group formed under project. However considering their past record of repayment the loan (see below chart), there might be a chance LRF committee might disapprove another loan to these groups. Below the chart reflects that every group failed to repay their loan amount to LRF committee fully or partially.
Planning Post Pandemic: what can be done to restart these groups
Following the discussions with various business groups it can be suggested that MSME recovery can be speeded along by:
· Identifying micro, small and medium enterprises.
· Vulnerability assessment of MSME sectors.
· Management of available capital
· Improving the creditworthiness of small businesses.
· Reducing transportation costs
· Building sustainable relationship between vendor and labor.
Identifying micro, small and medium enterprises: with little or no records, the government is struggling to identify and list down the exact number of MSMEs, especially micro enterprises, and the informal arrangements of employing workers. On 13 May 2020, the government announced a collateral-free loan of INR 3 lakh crores (USD 39.8 billion) for MSMEs32. However, only a fraction of the total MSMEs are currently connected to any form of formal banking/NBFCs/MFIs or semi-formal systems (Source: June 2020, Council on Energy, Environment and Water).
A compilation of the existing national and state-level databases of the workers and the business groups should be done by the MSME ministry as early as possible. In parallel a detailed and accurate, scalable, and real-time information system should be developed to identify and serve genuine beneficiaries of government schemes and aid. This will also help the government to develop effective policy measures and interventions, thus making them more productive and resilient in the longer term.
Developing a vulnerability assessment framework of MSME sectors: Different MSME groups have different vulnerabilities. For some financial aspects such as cash flow and debt are crucial factors whereas others might find availability of labour urgent. The government relief measures at present do not prioritise the beneficiaries based on their economic importance and vulnerability of sectors. Development of a vulnerability assessment framework of MSME sectors to efficiently target support measures by accounting for varying levels of vulnerabilities and sectoral nuances will help in effective use of government resources.
Management of available capital: Ensuring the capital made available reaches the people in need, appropriate technological support is obligatory. As of August 6, four million MSMEs had been sanctioned around 140,000 crore under the Emergency Credit Line Guarantee Scheme announced as part of the government’s 20 lakh crore relief package, of which around ~95,000 crore had been disbursed (National Small Industries Corporation), however the utilisation attempts in most of the cases were frail owing to improper infrastructure and limited awareness in order to properly use the aid. For bigger MSMEs, e-marketing should be strengthened and a special fund for technology upgradation is required as many MSMEs want to invest heavily in technology.
The MSME groups must also take account of their finances and figure out how much capital they have and should spend. They must ask three fundamental questions before spending this capital– Can it be eliminated? Can it be deferred? Can it be re-negotiated? This will help them to control the cash in hand.
Improving the creditworthiness of small businesses: Considering the bad track record of loan repayment, loans to these MSME groups should be only provided on strong conditions. Methods like Guarantor Mortgage can be adopted, requiring the guarantor to meet the borrower’s obligations if they default on their loan repayments. In addition to that, the repayment strategies can also be made a little flexible, so that these groups can first stabilize their business, with low monthly instalments for initial few months as a buffer for recovery. Delaying MSME loan repayments or extending tenures can also save a lot of struggling groups.
Reducing the transportation cost: As most of these groups procure the raw material from the outside, measures such as coming together and buying the raw material collectively by using rotation rules with in the groups will not only reduce the transportation cost but also reduce frequent exposure and risk of getting infected. Some groups work in the same sector, for e.g. -Three different stitching groups, using clothes and other similar products as a raw material. They should discuss and try to buy the raw material collectively from one vendor. Buying in bulk will reduce the cost.
Once the business starts and stabilises again, the groups should focus to hire local workers, because this will help them to cut down the transportation cost.
Build the relationship with vendor and labour: This is the most critical time for group owners to stay in touch with their vendors/customers and build better relations with them. As few groups have manufactured product, their dependence on the vendor is crucial.
 https://www.thehindu.com/business/msmes-will-be-the-biggest-casualty-of-covid-19-in-india study/article31084751.ece  https://www.livemint.com/news/india/why-india-s-small-enterprises-need-a-covid-19-rescue-act-11587540058972.html  https://m.economictimes.com/small-biz/sme-sector/after-the-pandemic-can-micro-and-small-businesses-spearhead-indias-economic-revival/articleshow/75370797.cms
 https://indianexpress.com/article/explained/coronavirus-india-lockdown-msme-sector-crisis-government-relief-package-6395731/  https://indianexpress.com/article/explained/coronavirus-india-lockdown-msme-sector-crisis-government-relief-package-6395731/