Working Capital To GST Rationalisation: How The SME Sector Can Recover

By now we know that the COVID-19 pandemic has dealt a significant blow to world economies.  It has brought to a sudden halt not just consumption, but demand, manufacturing, supply chain and capital.

There is virtually no consumption for anything beyond the essentials and manufacturing has been hit by supply-chain disruption and exodus of the workforce, and social distancing is likely to be the norm for a long time to come.

As India reopens its economy, millions of SME workers stay home. The Small and Medium Enterprises in India spawn 63.4 million units, accounts for nearly 30% of the GDP, and employs about 460 million people. Even if they start their factory, there is no raw material. If we acquire raw material, there is no labour, and if they have labour, they don’t have orders. 

Most of us in the SME sector is also facing the prospect of having our working capital drained off in the next three months; we cannot sustain beyond a few months. Pandemic causes risk aversion and economies opening up have felt the impact of either capital outflows or even slowdown in capital inflows. 

The Rs 20 lakh crore package announced by the Indian government is focussed on MSME, with very little for SMEs. However, it isn’t a completely dark tunnel. I see some light at the other end. As an instant relief measure, the government has announced the dispensing of quick loans of up to Rs 3 to 4 lakhs, which comes without any interest in the year one. 

This, I believe, is a positive step. It will give us access to working capital to tide over the next few months.

The government has also decided to pick up to 15% stocks in MSEs that have a very strong foundation and can weather the storm to emerge stronger at the other end. 

This step, too, will help infuse some liquidity into these countries.  

There are a few things that the government can continue to do to smoothen over the pain. To generate demand and the local economy, the government should increase duty on imports, and not just on finished products but also raw material. This will encourage our businesses to seek locally for alternatives. We could have a higher GST on products and raw materials that are imported.

Just like there is an ISI mark for quality, the government could launch a ‘Make in India’ mark for products completely manufactured/created/crafted in India. Right now, a lot of companies are trading and importing products, and then add a ‘Made in India’ tag to it. The government could also offer subsidies on the ‘Made in India’ products.

Additionally, I would recommend faster GST refunds and in case the refund takes time, the government should consider playing interest at this time to infuse liquidity in the system. 

More importantly, the Indian government should look at allaying fears about the pandemic. The issue of restarting consumption and addressing the demand shock should be a priority.

The Goldman Sachs Group has predicted that while the Indian GDP would fall in the second quarter at an annualized quarterly rate of 45%, it would rebound by 20% in the third quarter if the coronavirus lockdowns are lifted, it predicts.

We should not be hasty in lifting the lockdown and putting people’s lives at risk. Instead, a good idea may be to lay down protocols of safety, test wide-scale, shut down vastly contaminated zones and areas completely, create large-scale isolation centres, but allow those cities and districts which are in the green zone to completely open. 

Over the next six months, we will see a slow opening of the Indian economy. Backed by an epidemiological approach and enough backing, time and working capital funding offered to the industry, including SMEs, there is no reason why we will not be able to bounce back.