A leather goods store in Dharavi, Mumbai. Image by Dhiraj Singh / Bloomberg via Getty ImagesVSars honk, traffic roars. It is a usual day on 60 Feet Road from Dharavi to Mumbai. But stores on either side of the narrow road are not overflowing with activity like they would be before Covid. All the few stores that dot the street are closed.
âPreviously, at least five people would stop by my shop every day and ask me for directions to the leather market. Today, a buyer in several weeks is asking for directions. This is the state we are in, âexplains Armaan Ali, 67, a steel trader who has lost Rs 35-40 lakh in unsold stocks since the start of the pandemic. Dressed in a white kurta-pajamas and a skullcap, he has just returned to his shop after his namaaz prayers. After doing business for a few lakhs each month, he is now struggling to pay his rent of Rs 80,000. âThe situation is bad,â he says, as his sons circle apathetically; a worker sleeps on the corrugated iron sheets piled up inside the shop.
Further down the road, Kishor Bagve sits in his clothing store waiting for customers. âThings are improving, but we are far from pre-Covid levels,â says the 45-year-old, who has run his business since 2006. He was making around Rs 40,000 in sales every month; it’s now reduced to a fraction of that. âI manage to earn 200 to 400 Rs per day, enough to cover my family’s food expenses for the day. Government assistance was not received. âWe received no help. Besides, what am I going to do by taking out a loan? How will I reimburse it? “
The shoe store adjacent to Bagve is closed. âHe closed his doors and returned to his village during the first wave of Covid-19,â Bagve says of his neighbor trader. âHe hasn’t come back since. A pastry shop next door is empty of customers. “Nobody really comes anymore,” the attendant shrugged, shrugging his shoulders. Meanwhile, a roadside tea vendor and a vada pav vendor across the street are doing good business. A two-wheeler components and maintenance workshop also appears to be busy.
âThe pandemic was an exogenous shock. This has created a lot more disruption in the informal sector than in the formal sector, âsays Pranjul Bhandari, Managing Director and Chief Economist for India at HSBC Bank.
India has around 6.33 crore of micro, small and medium enterprises (MSMEs), which contributes 29% to India’s GDP. Of these, around 30 million MSMEs are registered on the Udyam registration portal, as of May 2021, according to the Ministry of Micro, Small and Medium Enterprises. Registered micro-enterprises accounted for around 28 lakh (93%), followed by small enterprises at 1.78 lakh (6%) and medium-sized enterprises at 24,657 (1%).
The 6 crores of unregistered businesses form the informal economy. The bulk of them – around 99%, according to Arun Kumar, professor of economics at the Institute of Social Sciences in Delhi – are micro-enterprises, defined as those with a turnover of less than 5 crore. of rupees.
Bhandari adds, âAbout 20% of the Indian workforce works in the formal sector, while 80% is employed in the informal economy. Of the 80 percent, half work in agriculture, while the other half, which represents 40 percent of India’s workforce, is typically employed in small businesses. In absolute terms, around 300 million people work in the informal sector; half of them (150 million) are generally employed in micro and small enterprises. “They are the ones who have been most disturbed by the pandemic,” she said.
In mid-May 2020, the government announced measures to help MSMEs overcome the pandemic. Among them was an unprecedented six-month moratorium on loans and a package of Rs3 lakh crore (later extended to Rs 4.5 lakh crore) that extended an emergency line of credit of up to 20% of a company’s outstanding credit (MSMEs and larger units). The loans, which were intended to provide working capital for day-to-day operations and overhead costs like rent and salaries, were to be disbursed through banks and non-bank financial corporations (NBFCs). The government also provided a partial credit guarantee worth Rs 20,000 crore to banks to encourage them to lend to struggling MSMEs.
According to government data published in July 2021, Rs 2.75 lakh crore (out of Rs 4.5 lakh crore), was sanctioned for 11 million businesses; the banks disbursed Rs 2.13 lakh crore of this.
While dismantling of the type of businesses that have taken out these loans is not available, microenterprises operating in the informal or unorganized sector have been largely left out, Kumar explains. There are several reasons for this. On the one hand, these companies generally employ 1.7 people on average; To be eligible for registration, businesses must employ 10 or more people and use electricity, or employ 20 or more people if they do not use electricity. âBy definition, micro units will not be recorded. This is why the government has difficulty in contacting them, âexplains Kumar.
Second, most microentrepreneurs are new to lending, which means that despite the government’s credit guarantee program, banks and NBFCs are reluctant to lend to them. âMany micro and small entrepreneurs run their businesses without a loan. In difficult times like this, it is difficult for them to become new customers on credit. Lenders will be careful in lending to them because they will be attentive to the quality of the assets. In addition, it may take some time before they get the money back under the government’s credit guarantee program, in the event of a borrower default. So lenders tend to be very conservative in times of crisis like this, âsays Chandra Shekhar Ghosh, Managing Director and CEO of Bandhan Bank.
Third, although economic activity is picking up, as evidenced by a slight increase in GST collections in July and August 2021, where they crossed the crore of Rs 1 lakh, after falling in May and June 2021 due to the second pandemic wave, according to the GST Council. data â the unorganized sector is not taking full advantage of it, says Kumar. âDemand is shifting from the unorganized sector to the organized sector. This has been the case since demonetization, âhe says. The trend gained momentum during the pandemic: e-merchants, for example, benefited from online shopping, but the corresponding demand from neighborhood stores fell. âIf demand changes, why will micro-entrepreneurs restart their businesses? It is a dire situation. Unemployment is very high among them.
In some cases, private actors, especially those operating in the microfinance segment, have succeeded in reaching this sector effectively. Pinky Yadav, 36, for example, ran a cosmetics store selling lipsticks and nail polish in a village 2 hours from Patna, before the pandemic began. She started the business to supplement the income of her husband, who is a tea seller. She brought home 800 to 1,000 rupees a day, she said. When the first pandemic wave hit and sales fell to zero, she took out a loan of Rs 30,000 from Arohan Financial Services, a Kolkata-based microfinance institution (MFI). She was a customer with them before the pandemic and was therefore able to quickly apply for and receive new credit. âThe first two months were very difficult,â recalls Yadav. “But things have improved since then.” During those two months, she took advantage of the Reserve Bank of India’s (RBI) six-month moratorium on loans. In the third month, she started her repayments, she says.
âThe 99% collection efficiency that MFIs typically report was obviously affected during the lockdowns. But we have advised our clients financially and managed collections of 75% even during the moratorium period â, explains Manoj Kumar Nambiar, Managing Director of Arohan.
Like most, Arohan has been “strict” with approving new borrowers, Nambiar says. âEven if a business has restarted, has it reached a level of activity where a loan can be repaid? We are careful about this. It helps that the knowledge of credit scores is strong among the borrowers. People don’t want to be called NPA and lose access to formal credit, which can cost 10 to 12 times less than local lenders.
So how long will it take for things to improve for the informal sector? HSBC’s Bhandari draws parallels between the disruption caused by demonetization and that caused by the pandemic. âAfter demonetization, we saw that the big publicly traded companies got richer and the smaller ones were disrupted. But a year later, when new banknotes were printed and money came back into the system, we saw small businesses make a comeback. So one line of thinking is that as the pandemic subsides, the informal sector will, over time, come back to life, âshe said.
On the other hand, she says, âDo we want this big informal sector? Yes, he’s a huge job creator and a GDP driver, so we need his presence. But we also need to help them become formal sector businesses. India grapples with the problem of “dwarfism,” a term used by economists to describe how small businesses stay small throughout their lifecycle. Bhandari believes the pandemic has offered an opportunity to “clean up the slate” and create an environment where micro-units can grow over time rather than remain dwarfs. This includes finding creative ways to ensure they have access to affordable funds; bring about labor reforms so that they can easily hire and fire; remove regulatory obstacles related to starting, operating and exiting a business; by giving them access to a âhard infrastructureâ such as a cheap and coherent power supply; and finally, the provision of âsoft infrastructureâ assistance such as marketing sourcing and technology support.
Already, organizations like the Indian Chamber of Micro, Small and Medium Enterprises (CIMSME) have set up dedicated toll-free numbers as well as physical centers (currently only in Delhi) where entrepreneurs can go to understand the various programs and government loans that they can take advantage of. âIt is a stressful time for MSMEs. They need to be held by the hand, âsays Mukesh Mohan Gupta, President of CIMSME.
With the easing of Covid restrictions, rising vaccination rates and the coming holiday season, a recovery may not be so far away.
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