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.
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
A report by the financial analysis organisation CRISIL has highlighted the contraction of the Indian GDP as a disaster for ‘small businesses’. The contraction in the Indian economy in FY21 due to the outbreak of the coronavirus pandemic has certainly and significantly hurt the Micro, Small and Medium Enterprises (MSMEs) across sectors. For small businesses, the fall in revenue has been steeper at 17–21% as weak demand gnaws away gains from lower commodity prices.
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.
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
Small businesses are seeing a direct fall in their revenues and profits due to the decreasing ‘buying capacity’ of consumers. And as a result of this fall in profits, these businesses are laying off or firing employees in order to stay afloat. This whole cycle of the company’s losses and employees’ getting fired is an offshoot of the worst nightmare of the small businesses in the country- the fear of getting crushed by big corporations.
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.
Efforts to stay afloat
Small businesses have tried various steps including salary cuts and leave without pay to keep them going, but these steps impact them and their co-dependents in even worse forms. This phenomenon of pay-cuts and selective hiring in the MSME industry can have a ‘multiplier effect’. Let’s say you run a Kirana shop in an area where many people working in the BPO sector stay, and have lost their jobs.
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 steps undertaken by the government to aid the ailing MSME sector have fallen short on all fronts. Challenges that await the current government are going to be even fiercer than the COVID-19 pandemic because the entire small scale industry has gone numb with the disastrous economic depression.
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.
The existential threat to MSMEs
It is, in fact, not hidden from anyone that the current GDP contraction poses an ‘existential threat’ to MSMEs. A -23.9 per cent contraction in (GDP) in the financial quarter April-June, 2020 has led the small scale businesses and industry to the brink of a complete collapse.
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.
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.
Written by Aakash Sharma. He is a member and the editor at Volunteers Collective. Aakash is a student of English Literature from the University of Delhi who writes with a focus on global politics, socio-economic issues and literary-cultural phenomenons.