Service sector MSMEs and their importance to small town economy

There has been lot of talk about the need for an urgent relief package for MSME in the COVID scenario. With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India's manufacturing output.
The point to be noted here is that besides manufacturing, there is a huge contribution of MSME’s to the service sector also. Let’s therefore focus on the small non essential retailer and the institutional government supplier. For small towns like Dehradun, these service sector MSMEs are the backbone of the local economy.
For the non essential retailer it’s been a triple whammy. No revenue as the shop is shut, no relief on fixed costs like rent and employee and bank EMI’s to be paid. And since these shops are non essentials there is no guarantee that post lockdown the customers will come in as before. Think retailers like garments or fashion or opticals or even food. And for many of them there is existing stock that has been bought but is now lying shut. That has to maintained. All this adds to the cost, while the revenue has totally bottomed out.
It is therefore worthwhile that the government thinks of a relief package for this segment. Can their rents be waived off or better still can the government pay for the rents, as for some of the landlords these rents are the only source of income. And any money in the system is better than no money. Can the bank EMI’s be waived off for 2-3 moths? Not just a moratorium which anyways is of not much use as interest is being charged on the moratorium period leading to a bigger payout at the end.
The supplier who answers government tenders to supply various services and equipment is in a similar financial crunch. When the lockdown was announced, end march, various government departments were issuing orders so as to prevent lapsing of last financial year’s budgets. The whole process came to an abrupt standstill and then to save money many orders were cancelled. In many cases the suppliers had already bought the equipment and have now an inventory which they have to pay for with no hope for any compensation. And the future looks equally grim with talks of government cutting budgets given the predicted fall in revenue collections. So, the banks are well within their rights to refuse these MSME traders working capital loans and even recall the loans. And if budget cuts materialise the things could get worse for them as small towns like Dehradun have hardly any corporates which will make up for the loss of government budgets.
It is therefore in the interest of small town economies like Doon that the government looks at not just the manufacturing MSMEs but also the service sector MSMEs and comes out with a separate relief package for them.

Economic reality post COVID 19

Over the last few weeks I have read many articles about how things will change post COVID. WFH will become a norm. Deglobalisation, with many companies and industries moving out of China to closer home, maybe to India. How technology will become more dominant etc.

While I disagree with some of the above I think our economic focus currently should be not lofty or too far fetched but rooted in reality and now. And the reality about our country is that it is the farming, vast skilled and unskilled labour and the service sector which needs to be reenergised, rebooted and sustained. 

Farming sector: We are in the thick of Rabi crop harvesting. Three areas of focus need to be 1) adequacy of labour to harvest 2) Storage and transport 3) Selling of the harvest. With labour force under lockdown or gone back home, 1 is an issue. We have always had inadequate storage so with no transportation allowed this problem with intensify. Mandis are working haphazardly so selling of the harvest is a big issue.

The repercussions of failing to focus on above three will be heavy. There could be food shortages and high prices. Plus farmers will have much less income so not only will rural India be distressed and have much less purchasing power, even the sowing of Kharif crop may take a hit.

Skilled and unskilled labour: This includes permanent factory staff, temp staff and then the migrant labour. While the skilled labour may have it fine after the lockdown most production facilities depend a lot on unskilled or temp labour too. These may not be easily available as they have either gone back home or are totally new so will have to be taught some basics. Their output could be much slower.

Service sector; Broadly I am including things like IT, Hotels, Tourism, Cab services, Food services, e-commerce, Banking, Financial etc. The good news is that technology has already helped these industries a lot. But most of them are still depending upon migrant labour. Ola and Uber have about 60% of their drivers who are migrants. If they have gone back, they will not come back soon. They will have tried to find some work in their home town or village and will be loathe to come back to face EMIs for their vehicles. If they don’t, the companies will have to find new drivers, work with the banks to transfer loans at attractive rates, or banks face higher NPAs. And that’s one sector. 

Summer is one of the biggest tourism season. That’s done and dusted this year. So what happens to hotels, restaurants, tour guides, cabs & bus drivers, hawkers, local souvenir shops, even to the local toll and GST collection? 

E-commerce will survive but their costs will increase. At least for 6 months anti virus measures and some form of social distancing will have to be maintained. That would also mean POD will become scarce. So less people may use e-commerce. And of course the availability of delivery boys will be a concern. 

I hear some stories about how the IT sector is already in dumps as call centres had to be shut down and outsourcing contracts were lost or have been foreclosed. Force majure could be the bane of the IT industry.

Lot of small business in service sector like barber and salon shops, the roadside mechanic shops, non essential shops selling stuff like electrical, electronic, plumbing, showrooms etc will face a double whammy of no revenue and the liability of rents for almost 6-7 weeks. Plus what happens to their labour? They have either gone back or one has paid their salaries to hold them back , which adds to the liability column.

The maid, the driver, the auto rickshaw driver, the labourer, what is their fate? They are the the cogs which keep the wheels of a city running. If we lose them even for a month or two after the lockdown the urban economy will falter. You can WFH but will the laptop repair or the wifi router shop be open? Or if your mobile breaks down?

My take is that if we can currently focus on saving and rebuilding the above then we may be much better off than talking about WFH or Deglobalisation. That to me frankly, is just a bonus. My worry is that will the basic survive? 

Post COVID 19- Not much will change

There have been many articles and sentiments expressed about business and work life post Coronavirus crisis. I would like to touch upon two points being debated. 

1) WFH will become the new norm. I beg to differ. At least in India it will not. Some reasons. For one WFH is a senior management luxury with people living in 3-4 BR homes and study areas. For the ordinary staff, sales force, customer service, call centres, lower management home means at best a 2BR space with parents and family to share the space. For the junior staff, the new recruits, first jobber it is worse. Rented shared rooms. For them an AC office with your own workstation is a luxury, an escape from the cacophony and drudgery at home. And I am not even getting into irregular power supply,  tech support, bandwidth issues etc with people spread all over towns and issues. Some have spoken about how rentals can be saved etc. But my guess is that investment into technology which is spread out and it’s maintenance will be a serious cost centre if WFH has to be the norm.

2) Deglobalisation. According to reports many US and Japanese companies are planning on pulling out of China and going home. Indeed Japan has set aside $ 2.5 billion for Japanese countries to come home from China. But the fundamental thing is that everyone is in business. And profits will continue to be the prime motive for any business. China has everything going in terms of systems, infrastructure, government backing. They will act quickly and offer better financial incentives, subsidies, tax relatives. Ultimately only a trickle will happen out of China. There will be no exodus.