Nine out of every 10 of India’s 63.3 million small businesses (termed micro, small, and medium enterprises or MSMEs) have restarted operations after the lockdown necessitated by Covid-19, but only one in four is producing at least half its capacity — largely on account of poor demand, logistical issues, and their own financial troubles (at least half said they faced a liquidity crunch as of August 1).

“85% of MSME units operate from households and as their exposure to formal banking is almost zero, they are not able to take the benefit of the Centre’s liquidity package, which is linked to outstanding bank credit. The government should come out with a separate fund or fast-track MUDRA [Micro Units Development & Refinance Agency Ltd] loan for these people. 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,” said Tamal Sarkar, executive director of Foundation for MSME Cluster.

And 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.

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The numbers highlight the toll the pandemic and the lockdown imposed to slow its spread (while the national lockdown ended on May 31, localised lockdowns continue across many parts of India as cases continue to rise) has taken on what is popularly described as the backbone of Indian industry — MSMEs.

The numbers are part of a presentation made by the ministry of MSMEs this week, and based on a survey conducted by National Small Industries Corporation.

India’s small businesses employ around 110 million people and accounted for almost half of India’s exports in 2019-20. According to the presentation, they also account for around 30% of GDP.

“If the MSME can’t produce, big industries would not be able to survive in India. To give just one example, India is the world’s largest producer of bicycles and 98% of bicycle parts are made by MSMEs. They are also a cost-effective way of production as one MSME’s scrap is raw material for another. The government must do everything to turn it around to revive the Indian industry,” said Gurmeet Singh Kular, president of Federation of Industrial & Commercial Organization (FICO).

To be sure, the August survey (around 3,100 MSMEs responded) show an improvement over the July and June ones. For instance, in June, only 18.2% of MSMEs were producing more than 50% of their capacity; and in June 70% of MSMEs said they faced a liquidity crunch.

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“One cannot talk of last month or August only but have to start from the beginning. In April and May, there was almost total closure, no [availability of] labour, no liquidity. June onwards, there is tremendous improvement, especially after the Atmanirbhar Bharat package was put in place in mid-May. To be precise, from mid-March to entire April, [there] was almost total closure and the sector started opening only from May,” said the spokesperson of the ministry of micro, small and medium enterprises.

In addition to this, the presentation also identified sectors such as automobiles, tourism, consumer products and apparel as those worst affected by the pandemic, while listing internet service providers, online retailers, and pharma companies as possible beneficiaries.

Interestingly, the presentation also showed the overlap between India’s industrial belts and the regions worst affected by the pandemic: states accounting for 72% of the country’s total industrial output saw around 60% of Covid-19 cases (till August 1).

This highlights the economic challenge before the country; consensus estimates say the Indian economy will contract by at lest 5% this financial year. For instance, Maharashtra , Tamil Nadu and Karnataka accounted for exactly a third of the country’s industrial output but also 43% of active cases (as on August 1).

Most MSMEs do not seem to be worried about labour shortage — despite at least 10 million migrant workers leaving for their homes in the hinterland during the lockdown. Just 9% of the respondents in the August survey flagged labour shortage compared to 12% respondents facing problem with raw materials. Still, this could just be because of poor demand and lack of working capital — forcing many of these businesses to operate at low capacity.