Executive Summary

Despite its prominent role in the economy, the micro, small, and medium enterprise (MSME) sector
faces tremendous challenges to its growth. Adding to the existing set of obstacles is the onset of the
COVID-19 pandemic, which poses a significant challenge to the survival of MSMEs. In an attempt to
curb the COVID-19 outbreak, India implemented a nationwide lockdown on 24th March, 2020. The
lockdown has had a major impact on the economy, especially in terms of loss in output, revenue, and,
most importantly, jobs.

This report provides evidence on how MSME enterprises are impacted and resilient to the COVID-
19 crisis induced lockdown in the state of Tamil Nadu. In order to understand the impact, we obtained
data from more than 1200 MSMEs belonging to manufacturing, trading, and services. Our data set
contain information including firm size, cash flow situation, labour issues and layoffs, beliefs on future
prospects, and awareness of policy support programmes that can help the enterprises, as well as the
industry readiness for the industrial revolution 4.0. Based on the data analysis, we have adequately
addressed the important policy suggestions that can be used by the policy makers and industry bodies
not only in the current context but to any mitigate future economic shocks.

Almost 78 percent of the respondents reported they are shut down. When we analyze the same
using the firm size, we find that micro and small firms are heavily hit with 79 percent of them shut
down. Among the crisis induced business disruptions, enterprises mentioned delayed payments from
the buyers (41.38%) is highest, followed by the reduced logistics services (27%). Among the other
apprehensions, enterprises expressed concerns about employee absence due to ill health and domestic
care. Further, regarding the other obstacles that the enterprises face, we observe that cancellation
of existing orders is the major concern for the enterprises. On an average, 50 percent of the sample
enterprises report cancellation of orders. In the current context, especially for business to business (B2B)
MSME enterprises, the financial fragility generated by the cancellation of orders is unsustainable. The
cancellation of orders is likely to create a ripple effect since it is likely to create cash flow issues for
the enterprises, which again will have a direct effect on the wage payments to the workers. Around 38
percent of the enterprises cite inability to deliver existing orders, increased difficulty of financing and
difficulty in extension of existing loans as the other obstacles.

Regarding the revenue loss, large majority suffered more than 50- 80 percent. At an aggregate
level, around 74 percent of sample MSMEs have reported decrease of more than 80 percent in revenue
(which is almost of three forth of our sample). Severely affected sectors include manufacturing, financial
services, software, and transportation sector. We find that exporters have suffered more losses compared
to the non-exporters. More than one third of the enterprises report payment towards raw materials and
electricity tariff as a significant financial difficulty. Around 68 percent of the enterprises have only less
than one month of cash flows to cover their operations. Remaining one fourth has cash flows to meet
expenses up to three months. These findings call for policies to mitigate the cash flow shortage, which
has wider implications in the form of employee layoffs and large-scale firm exits. We also asked the
responded the number of months that an enterprise take to recover from the crisis. About 14 percent of
the enterprises report three months, while 12 percent of the enterprises mention six months to recover.
Interestingly, 68 percent of the enterprises have no intention to permanently shut-down.

There is an urgent need to take immediate steps not only to contain the spread of the virus but also
to address the concerns of MSME sector which can help in mitigating the impact of the outbreak on
the Indian economy. A combination of monetary, fiscal needed to help the businesses to cope with the
crisis. It is important to incentivize local firms/informal entrepreneurs to enter new markets. During
the pandemic, there is a possibility of increasing demand for new avenues in the economy and the policy
makers can identify and skill the displaced labour force to engage in the new employment scenario. List
of suggested policies are as follows:
 I) Improve access to capital/finance
A lot of MSMEs are currently struggling to recover in the wake of the COVID-19 crisis.

• Improved access to finance, with reduced interest rate on loans and simpler processes, is an
essential step that would help business deal with the immediate aftermath of the crisis.
• There should be targeted credit support policies aimed at supporting micro segment of the
MSME sector.
• Credit should be extended not just to the existing borrowers but new borrowers, given that
funding needs are likely to increase with the ensuing with the looming economic crisis.
• Steps should be taken to implement postponement of repayments of existing bank loans for
a specific time period (e.g., six months).
• Payment of the pending GST compensation
• Ensure flow of money into the working capital of MSMEs for survival
• Increase borrowing of MSMEs finance its working capital requirements with the interest rate
capped at 4-5 percent per annum and a repayment period of up to five years.
• Allow MSME to defer payment of principal and should pay interest till a period of one year
after re-opening.

II) Incentives to reduce business costs

MSMEs are confronted with high business costs, particularly for rents and electricity expenses. This
is a challenge that has a high propensity to harm business profitability and sustainability in
the state.

• Concessions to reduce such costs/reduction in power tariffs for MSMEs should be considered.
• Deferral of the payment of property taxes.
• Provide income support and temporary direct cash payments to all vulnerable workers in-
cluding women and migrant workers.
• Legislation for payment delays. Mandatory payments to the suppliers within 45 days.

III) Human resource development and skill developmet

• Enable MSMEs to continue operation with lesser workforce
• Lack of skilled labour force is another constraint to doing business. This is an opportunity
for agencies (academic and industry) to work collaboratively with partners to address this
challenge.
• Digitalization of enterprises
• Tamil Nadu can introduce State Enterprise Development Grant
• Creation of a special fund for micro enterprises
• Provide subsidy to the MSMEs to produce PPEs, masks, gloves, and medical kits
• Based on the sensitiveness of sector due to the pandemic, allow different rates of wage offset
• Start-up grants for the innovative advance manufacturing firms
IV) Long term policies
• Initiate Trade Loan Programme and allow medium and small firms to get higher amount of
loan to finance trade needs
• Introduce insurance schemes at financial crisis for the MSMEs
• Encourage internet-finance entities to provide credit to the MSMEs
• Enable job support scheme where the Government should co-fund for a period of not less
than one year.
• Introduce wage credit scheme to support increase in wage rate.
 • Training and development programme, and incentivise employers to train and upskill workers
• Under Digital India initiative, build digital capabilities for the MSMEs
• Increase digital solutions and encourage technology transfer at subsidised and affordable rates
• Industry academia link to increase research and development and review of MSMEs sector
periodically
• Setting up a portal to simplify the registration process of the enterprises
• Increase the timely availability and frequency of data pertaining to MSMEs in Tamil Nadu

These policies are based on evidence-based research conducted by us using one of the largest pool of
firms in MSMEs in Tamil Nadu. We believe these policies are appropriate and need of the hour to help
MSMEs to survive and grow. We plan to have systemic engagement with MSMEs and prepare repeated
data and information over time. This will help not only understanding the impact of CODIV-19 on the
MSME sector of Tamil Nadu, but also create a strong industry-academia link for possibility of research
studies on various issues and concerns of this sector.

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