How India’s GDP contraction affected small businesses in 2020?

When India’s economy got trimmed by -23.9 per cent in 2020, it was certain that almost every citizen was going to be affected by the economic depression — one way or another.

MSME-Recession Indian economy in a bad condition- Volunteers Collective
Indian MSMEs are on the brink of collective collapse

With the COVID-19 pandemic soaring at the fastest rate and the economy, which was in the precincts of a catastrophe long before the pandemic hit, collapsing at the highest negative rate in the world, many are rightly wondering if we are at the economic nadir of independent India’s history.

Amidst the economic turmoil that has literally pushed millions of Indians under the cosh, the bottom section of the society has been at the worst receiving end. This section primarily comprises small businesses (MSMEs), daily wage workers and even a large portion of the corporate service sector.

Contraction of the Indian GDP - A disaster for Small Businesses

The main reason for the large hue and cry by the Indian public about this big loss of the country’s economy is that the ‘mixed’ Indian economy is built by the combination of a huge ‘informal sector’ along with the organised sectors of services and businesses.

Indian GDP contracted by -23%- Volunteers Collective
Indian GDP contracted by -23%- Volunteers Collective
Indian GDP Contraction nadir in July 2020

In this regard, while the economy has currently contracted by 23.9 per cent, consumption as a whole has contracted by 26.7 per cent in the country. This clearly means that people have started to cut down their consumption of products and services- meaning that they are spending less than before.

This reduction in people’s spending is a direct result of the loss of money they have suffered, or are afraid to suffer from, directly or indirectly. Direct loss of purchasing power, i.e. liquid money, for people means that they lost their job or business due to the bad economic conditions worsened by the COVID-19 pandemic.

A direct fall in business’ revenues

Even as the people in the unorganised sector and the Micro, Small and Medium Enterprises (MSMEs) continue to suffer from the worsening economy, giant corporations like Reliance Industries Limited and Amazon (India) have continued to post profitable records throughout the past six months. Drawing from precedents, previous downturns have shown that micro and small enterprises are unable to manage transient working capital challenges as easily as their large and medium peers.

Recession in India- Volunteers Collective
Recession in India- Volunteers Collective
India is in an active economic recession

Efforts to stay afloat

It is but natural that they will cut down on their spending and your earnings will fall as a result. It is worth repeating the cliché here that one man’s spending is another man’s income at the end of the day. This is how the cycle of economic depression impacts the organised and the unorganised sectors of the economy simultaneously.

Government’s insufficient intervention

The government brought in almost intangible changes like the new definition of MSMEs, frivolous loan schemes with poorly implemented policies and laid out ineffective guidelines. It adopted a middle path rather than going the full way that probably would have actually benefited the MSMEs the most.

India in recession- Volunteers Collective
India in recession- Volunteers Collective
Recession data (Courtesy- Business Today)

The existential threat to MSMEs

Policy interventions by the Reserve Bank of India and the finance ministry have offered little hope because their feeble interventions cannot revive demand in any way unless the common people have the capability to spend money and buy products. The fact that liquid money directly in people’s pockets is crucial for small businesses cannot be stressed enough.

Indian economy to contract by 10.3% in 2020; may bounce back with an 8.8% growth rate in 2021: IMF

The collective effort of the government amalgamated with sectors across industries and local administrations must be towards the generation of REVENUE GROWTH of businesses and enterprises, especially the MSMEs. The bigger companies must join in the effort of rescuing India from the perilous and worst economic disaster the country finds itself in currently by working in tandem with the government at every level.

Views are the writer’s own and do not necessarily represent the viewpoint of Volunteers Collective.

Volunteers Collective is a Delhi based citizen’s collective run by people from diverse professional and academic backgrounds working for the collective welfare.