India's manufacturing reels from the impact of COVID-19
24 April 2020 René Van Berkel, UNIDO Representative at the Regional Office India
To try and prevent the spread of COVID-19, the Indian government imposed a nationwide lockdown on 24 March. To gauge the impact on micro, small and medium-sized enterprises (MSMEs), the United Nations Industrial Development Organization (UNIDO) contacted 85 enterprises and asked about the challenges they are facing and their expectations and plans for the revival of their businesses once the lockdown is lifted. The survey was conducted by telephone during the period 9-13 April and included enterprises engaged in the automotive components, bicycle, paper, textile, ceramic, foundry, tea and rice milling sectors in clusters across the country.
Manufacturing in India is standing idle
The results of the survey indicate that manufacturing in India has stopped, except for the rice milling sector where production has reportedly dropped by half. In several sectors, including automotive components, MSMEs were already experiencing a pre-lockdown decline in business, due to a stagnating economy and market demand and the disruption of international supply chains due to the lockdown in China. Some communications, sales, administrative and other support activities are being undertaken from home but on a rather limited scale. Migrant workers, particularly semi and unskilled workers, have returned in large numbers to their hometowns. One bicycle-parts manufacturer has succeeded in innovating and got involved in the manufacture of ventilators, although it only retains a small fraction of its regular workforce.
The movement of materials, as well as fuels and people, has by and large come to an abrupt standstill. Manufacturing MSMEs almost exclusively supply other industries, which have also stopped operating, resulting in reduced demand and cancellations of orders across the board, with the exception of essential industries. However their demands for necessary inputs from non-essential industries cannot be met. For example, the paper industry cannot meet current demands for high-quality paper for pharma, food and hygienic applications. The disruption of the flow of materials and goods is having negative implications on other aspects of business, in particular an abrupt end to incoming cash flows and the migration of workforce across all skill levels.
Restarting business is a mega-challenge
For the MSMEs participating in the survey, the main challenges for restarting business are:
- COVID-19 will remain around and create a high degree of uncertainty in all aspects of business. In particular, the need to avoid the further spread of COVID-19 in the workplace or through the movement of people and materials may result in further restrictions and a potential return to lockdown.
- When restrictions are lifted, the market is expected to be very tight and extremely cash-constrained. This is largely due to extreme uncertainties with regard to demand for MSMEs' products (and/or ability to deliver products to the market) and consequent low or non-existing business income while expenses for labour, energy, rent and other business inputs will still be incurred.
- Manpower will be a constraint, with MSMEs indicating that 30 to 70 per cent of their pre-COVID-19 workforce may have migrated back to their hometowns due to uncertainties and loss of income during the lockdown. It will be a challenge to convince staff to return or to hire new staff, and the staff turnover is expected to impact negatively on productivity and quality, adding further to financial concerns.
- Machinery and stocks of raw materials, work in progress and final products will have degraded. MSMEs will need to undertake outstanding maintenance and service, and clean out wasted stocks, before they can resume operations, at a significant cost and with likely write-offs of stocks currently trapped on-site.
- Ensuring timely supplies of essential inputs without price hikes is a matter of concern. Those MSMEs that are critically dependent on specialized parts from other states or from abroad express concerns about their vulnerability to supply shortages.
Forward-planning has only just begun
Even though MSMEs have started to think through potential solutions to the many and diverse restart challenges, forward planning still appears to be in its early stages. Many trust that their problem-solving skills will help them succeed in addressing the issues one at a time, on the go, whereas others put emphasis on their systematic problem-solving capabilities. MSMEs have started to consider workforce-related solutions, through ongoing communications with workers (including those who returned to their home state), setting up buddy systems (potentially with retired employees and/or client technical staff), engagement with industrial training institutes and hiring of temporary workers on walk-in basis.
To ease the financial crunch, MSMEs have started to look at options to reduce or defer less-essential expenses (including reduction of stocks, deferment of investments, etc.), to secure income (including outstanding dues from buyers, particularly government and public sector undertakings), to access additional working capital (through low-interest loans and/or from retained earnings) and/or to appeal for government fiscal and/or financial support.
Several MSMEs had already started pre-lockdown with some measures for COVID-19 infection prevention and control, particularly through awareness-raising and communication (on hygiene, physical distancing, etc.) and, in some cases, the provision of hand sanitizers, masks and gloves. This forms the basis for stepping up preventive measures post lock-down, and here MSMEs are looking to the government for specific guidance. Common measures under consideration are health checks at the factory entrance, the provision of personal protective equipment (PPE), staggering of shifts and break times to minimize congestion of people, maintaining physical distancing during work and compulsory use of Aarogya Setu, the government’s COVID-19 contact tracing app.
Few MSMEs are considering further measures such as the installation of sanitization tunnels, pre-restart fumigation of factory premises or rearrangement of work stations to maintain physical distancing. Some MSMEs expect that they will need to reduce or even halve staff numbers and keep visitors out, and may need to make alternative arrangements for providing food and drink at work.
There is a general apprehension that the future new normal will be different from what it used to be in the past. The time required to achieve some normalcy is expected to be significant, with minimum estimates varying between six weeks and six months. This will depend heavily on how the COVID-19 pandemic unfolds in India and globally in the coming weeks, as well as on policy responses and stimulus packages.
Overcoming the cash crunch
The most immediate concerns currently on the minds of MSMEs are cash flow and working capital. Most are concerned that survival is only possible with a substantive financial and/or fiscal support package from the government specifically for MSMEs. Some MSMEs believe that a financial stimulus will be enough, but others are recognizing that COVID-19 is a wake-up call to change and improve different aspects of MSME operations as well as the MSME ecosystem and the value chains in which they participate.
- The companies participating in the survey are or have been working with UNIDO as part of its programmes with the Government of India (through the Department for Promotion of Industry and Internal Trade, the Department for Heavy Industry, the Office of Development Commissioner (MSMEs), and the Bureau of Energy Efficiency).