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Opinion

The year that was and what lies ahead for the MSMEs

11/01/2022 5 Min Read

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Trade took a beating in the pandemic years but proved to be surprisingly resilient. Against all odds, the Indian Micro, Small & Medium Enterprises (MSMEs) created a space for themselves in an uncertain market. So, what does 2022 have in store?

When 2021 dawned, the world was just emerging from its first battle with covid-19. After being battered by the initial wave and the subsequent stringent lockdowns that nations imposed, global trade began to limp back to some semblance of normalcy. However, that period was short-lived. The second covid-19 wave in early 2021 was, if anything, more devastating than the first. Lives were lost, as were livelihoods. Trade, whether domestic or international, took a beating. States imposed strict curbs on the movement of goods and people. The result: prices of commodities began rising inexorably, small businesses shut, and workers fled to their homes in the villages.

The repeated lockdowns and curfews and the inability to run factories with half the workforce saw hundreds of MSMEs shut shop. In early 2021, reports quoted a survey by the All-India Manufacturers’ Organisation, which showed that 35% of the country’s 63 million MSMEs were forced to close their businesses.

It was a gloomy scenario, no doubt, and too many small businesses were left cash-starved. The industrial sector performance in 2020-21 fell to -8.4%. In addition, mining and manufacturing was hit, resulting in less demand for electricity, and the electricity generation sector witnessed a fall of 0.5%.

A Silver Lining

Even when the country struggled through the second wave and came into the limelight for international criticism over a broken healthcare system, a few sectors saw positive growth. Retail, particularly consumer goods, was a shining example. According to a study by Boston Consulting Group, the online retail market in India is likely to touch $350 billion by 2030 from an estimated $55 billion in 2021. Online shopping, deliveries, backed by a robust digital payments platform, helped the retail industry’s momentum going even when things were tough.

Since e-commerce supply chains are robust and cater to small players, MSMEs could reach a far larger market online. In fact, the ease of doing business online encouraged smaller firms to experiment with niche products and regional specialties. The government’s One District One Product scheme also gave a fillip to MSMEs. Moreover, a few MSMEs opted to stay on traditional avenues that were still profitable. The government’s push for self-reliance, coupled with an increased demand for healthcare consumables (masks, hand sanitisers, PPE equipment, etc.), saw several small manufacturers enter this space.

Still in Choppy Waters

While it’s certainly true that MSMEs showed resilience, the fact is that there are systemic issues that are yet to be resolved and which have become worse thanks to the pandemic.

Because of their size, MSMEs don’t have the muscle to leverage good deals in sourcing raw materials or shipping, which is not the case with larger companies as they have better bargaining power. In the case of shipping, large exporters paid steep premiums to shipping companies to ensure that containers and ships would be available to them. Small players lack the monetary muscle to do this.

Smaller companies have begun to realise the benefits of the e-commerce supply chain. An IBEF report explains: “E-commerce platforms can provide MSMEs with an opportunity to directly deal with manufacturers and suppliers and thereby, help reduce the cost of procurement by removing intermediaries and make long-term contracts. Numerous e-commerce B2B platforms have created a hub and spoke models for supply chain management; this allows MSME partners to lower storage costs and downtime.”

The other long-standing issue for MSMEs is the challenge of accessing funds. This is an old problem, which has not gotten any better with time. Formal lines of credit are difficult for many MSMEs to avail of because banks and large financial institutions demand collateral in some form. Small companies which live from payment to payment don’t have such collateral. Banks see MSMEs as risky borrowers because they are small, and their order books aren’t robust.

There’s also another long-standing pain point for MSMEs– delayed payments. MSMEs cannot bargain for better payment schedules due to their small size. Delayed payments mean MSMEs are even stretched when meeting the day-to-day operating costs. This is where fintech lenders come in, offering collateral-free loans and digital due diligence. They also provide trade finance and invoice financing.

While fintech lenders have eased the way to credit for many MSMEs, there are too few fintech firms and too many MSMEs. In order to reach out to more small companies, it’s time the government stepped in to mandate larger banks to put MSMEs on a priority list or find other ways to offer credit at scale.

Conclusion

Despite the shadow of Omicron, many predict India may not undergo a complete lockdown as in 2020. Fewer restrictions on the movement of goods coupled with some assistance in access to credit could mean that MSMEs will have fewer struggles in 2022.

The article was first published on thesmeindia.com

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Pushkar Mukewar

CEO/Co-Founder at Drip Capital

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