How the COVID-19 could Impact Entrepreneurs and Start-ups

Dr. Sriparna B Baruah

The coronavirus pandemic has brought the world to a standstill. The worst affected segment in this crisis are unarguably the Micro Small and Medium Enterprises (MSMEs) and the entrepreneurs.

With businesses shut off and fixed costs dangling over them, MSMEs are unable to handle the situation. While for the MSMEs, the shocks and surprises are not new, particularly after demonetisation and implementation of the GST policy, COVID 19 has nonetheless brought a unique predicament in the lives of entrepreneurs of small and medium businesses.

With the preventive measures taken by the government to control the COVID=19 pandemic, small businesses, start-ups and entrepreneurs have emerged as one of the most vulnerable groups that have been directly affected by these measures. It is unquestionable that large number of the micro small and medium enterprises (MSMEs) in some sectors will be choked, possibly to the extent of perpetual closure.

MSMEs contribute nearly 30% of India’s Gross Domestic Product and close to half the total country’s exports. This is the backbone of the economy and deserves urgent financial stimulus and a safety net. The lockdown has the potential to restrict the demand for SME products, and the disruption in the supply chain has a tendency to push up the prices of raw-materials. This may negatively affect the MSME cash flows. Also as a result of payment delays, MSMEs are facing financial hardships and liquidity constraints and this will lead to pressure on their working capital management. Further, unavailability of migrant labours will severely affect the sustainability of their operations.

The immediate challenge for MSMEs is to pay statutory dues and wages and to repay creditors. The payment of PF, GST, advance tax and running cost, including payments for electricity, water and other bills, EMI for pending loans from banks or financial institutions are severely hitting this sector. MSMEs pertaining to supply chains of hotels, airlines, logistics and tourism and transport have already seen their businesses drop. Other impacted sectors include consumer goods, garments and automotive sector which have also seen a sharp decline in their export orders.

Along with the MSMEs, the start-ups will also sharply feel the consequences of the Pandemic. There is an overall decline in the productivity and in this digital age, most newly formed companies and start-ups ,adopt a lean organisation structure and employees have more cross functional roles. Even a small decrease in productivity can build a serious problem for the business. In fact, in every aspect of their business, from fund raising, to customers to employees to suppliers, there will be challenges. Funding deals are likely to be delayed. Start-ups that provide flight transport and hotel bookings have naturally been worst hit. However, it is interesting to note that start-ups in some other sectors are witnessing a sharp increase in business.

Videoconferencing firms for instance are adding hordes of users as companies conduct meetings online. Gaming, streaming and online education content providers are all reporting a significant increase in users and time spent on their platforms. Online food and Grocery and medicine delivery start-ups are seeing a boom.

Lending start-ups have not seen major disruptions in their business. Soon; they will have to deal with a paradox: more people will need loans, even as an increasing number of existing customers may find it tough to make repayments.

Meanwhile, Insurance start-ups are seeing a sharp increase in demand and in most cases it is translating into actual business as some start-ups are offering products to cover Covid 19 treatment cost. Wealth Management start-ups are expected to see a drop in business. The impact on payment apps is not clear as the country’s financial system is reeling under the burden of Yes Bank’s collapse.

Looking at the sector wise impact of COVID 19 Pandemic, it is seen that

• The Textile and Apparel sector which provides 45 million direct employment and contributes 2% of GDP, the demand shocks are expected to hurt the Indian Textile exports and employment will be impacted because of limited demand.
• The Auto and auto components sector which provides 40 million employment and contributes 7.1% of GDP will be significantly impact people’s purchasing power
• The Aviation and Tourism sector, which provides 42.7 million employment and contributes 2.4% of GDP, is amongst the first sectors to be hit .The tourism and the hospitality sector will see a huge job loss.
• The Building and the real estate sector is one of the biggest employment generator in the country and has a multiplier effect on around 250 allied industries. Housing is expected to have a muted demand and significant reduction in new launches.
• The Consumer, retail and Internet business which contributes 10% of the GDP and provides 8% employment will see an immediate uptick due to hoarding of essentials ,however the retailers need to be wary of the supply chain disruptions
• The Education and Skilling sector has a market size of $101.1 billion dollars. The sluggish human resource requirement is likely to increase unemployment and even after the operations resume, there will be issues relating to sustainability of MSMEs, thus leading to large number of layoffs. It will be important to introduce basic healthcare e-learning courses in order to meet the healthcare professionals
• The Food and Agri sector which contributes to 16.5% of GDP and provides 43% of the total employment, the impact is likely to be low on both primary agricultural produce and usage of agri inputs like seeds, pesticides and fertilisers. However, all good exports to major economies will grapple for the next six months
• The Transport and Logistics sector which contributes 14% of GSP and provides employment to 8.27 million people, will see a medium impact. However reduced demand for logistics due to reduced production across all sectors will put a downward pressure across transportation and logistics sub sectors like warehousing, freight transportation etc.

In Northeast India the major sectors contributing towards employment and revenue include tourism, agro and allied, handloom and handicraft and the tea industry. While all these sectors have been negatively impacted, a special bailout package for tea and tourism and hospitality sector needed.

The Reserve Bank of India has announced an indicative list of COVID19 operations and business continuity measures including allowing a moratorium on term loans, eased working capital financing and deferred interest payment on working capital facilities without an asset classification downgrade. The government has also introduced measures permitting delayed GST payments until June 2020, without levy of interest, late fees or penalties. Despite these measures, there are reports that the MSMEs are unsure of paying salaries and creditors, given the current freeze in production and supply, coupled with slowing demands.

Positives emerge from the assurance given by the minister of MSME Shri Nitin Gadkari regarding restructuring of MSMEs in the coming days and creation of a Rs 10,000 crore ‘Fund of Funds’ that will facilitate MSMEs to raise money from the capital market, as a portion of their equity will be purchased by the government.

It is important that the Ministry of MSME draws up a policy framework with multiple scenarios for how to continue business operations commensurate to the spread of the virus. The proposed policy framework, could consider the following.

• Wage support or subsidy package could be made available to employers to pay salaries and other statutory dues specially to the contractual /daily wage workers
• It will be crucial that the self employed MSME units be given a salary net needed to navigate the crisis. There may be room to compensate (subject to a cap) self employed businesses who can prove a decrease in turnover.
• Treatment of commercial electricity, water and other utility bills could be examined specifically in the scenario where lockdown has been further extended. It will be extremely beneficial for units to be offered deferment or be required to pay property tax, rent and other utilities in order to avoid further costs and liquidity shortfalls, since payment of personal salaries should be a priority for enterprise owners.

Covid 19 is a crisis with an unforeseeable ending. What is clear though is that the government and businesses—both large and small ,will have to work together to ensure the protection of workers, be ready for risk management in terms of phased re-starting of business operations and be prepared to open structural changes in business activity.

Newer solutions will be the need of the hour that may not have been foreseen as yet. Post this pandemic, the business scenario will be completely changed and every sector will have to be looked at in a different way for sustainability.

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