The effect of COVID 19 on the digitization of SMEs: A Review
Abstract
The world is facing the corona-virus pandemic “Covid-19”.It started to spread from Wuhan, a city of China, in the fourth quarter of 2019. It led to the downfall of the economy of China. It then started to spread to the other parts of the world. As a response to this, the majority of the countries shut down their airports and seaways. Everything comes to still. Imports and exports were banned, as this would risk the spread of pandemic [1].
India also responded in the same way as most of the giants acted. Lockdown was imposed countrywide, and all the industries were shut down, immigration was not allowed as airports and seaways were closed to minimize the risk of Covid-19.
India is a developing nation with registered and unregistered SMEs counting to 42.5 million, staggering 95% of the country’s total industrial units. SMEs are the backbone of the Indian economy. SMEs produce 45% of the entire manufacturing output in the country. These are hit very hard due to lockdown imposed on them. It employs around 120 million people in India, has a huge commitment to GDP, contributes about 45% of exports, makes way for comprehensive development and budgetary implications. However, shortage of resources of money, manpower, material, and absence of FDI, less use of technology, the vulnerability of infrastructural facilities, and lack of marketing assistance are some of the challenges faced by SMEs [2].
The paper focuses on the impact of lockdown on SMEs due to COVID 19 and makes appropriate suggestions to SMEs to deal with the impact. The core areas of impact were market, finance, logistics, manufacturing, people, premises, managerial implications. Government measures to tackle the impact and suggestions were given to deal with lockdown and to survive the slap of pandemic. The government should take action before the time bomb explodes and try to help the SMEs to survive, the most important aspect of our Indian economy.
In the present paper, we have discussed the effect of the pandemic on the manufacturing sector in India with emphasis on SMEs in India and step towards their digitization.
Keywords: Covid-19, SMEs, Manufacturing, challenges to SME
Introduction
Manufacturing plays an important role in the development of nations by contributing to GDPs. The contribution of manufacturing in the development of the country plays an important role. The contribution of SMEs in the GDP is currently around 6.11% of the manufacturing GDP and 24.63% of the Service sector GDP.
SME sector comprising of manufacturing, infrastructure, service industry, food processing, packaging, chemicals, and IT, has emerged as the most vibrant and dynamic engine of growth of the Indian economy over the past few decades. These self-funded proprietary firms, private co-operatives, private self-help groups, Khadi, and Village and Coir industries, provide not only huge employment opportunities but also ensure regional balance by taking industrialization to rural and backward areas.
Literature review
Fig1: Survey Response of SMEs to Covid-19 []
The data shows the importance of this sector:
Table 1: Position of SMEs in India
Number of SMEs in India (registerd & unregisterd)
42.50 million
Share of total manufacturing industrial units
95%
Employment provided
106 million (40% of India’s Workforce)
Number of products
More than 6000
GDP contribution (manufacturing)
6.1%
GDP contribution (service industry)
24.6 %
SME Exports
40% of total exports
Average Growth Rate
10 %
To combat the crisis, the Government of India announced several reliefs for the SME sector:
- A relief package of 3.5 lakh crores. This seemed to provide temporary relief to the SMEs, but the unregistered SMEs can’t be benefitted from this. 74% of the SMEs found the relief package to be adequate, 9% found this as perfect, and 17 % didn’t express their views about the package.
- SMEs were reclassified on the basis of turnover and Changed the classification of the SMEs based on turnover and investment.
- Provided relief in loans and repayment of loans to the SMEs for 3 months.
Importance of SMEs in India
Cheap Labor and minimum overhead:
Large scale industries face the issue of retention of labor for skilled workers. They have to hire an effective HR manager which is an extra expense for the company. But SMEs don’t require highly skilled labor hence they have less indirect expenses.
Employment Generation
As this sector requires low capital input to start the business, it generates vast opportunities for unemployed youth. In India about 1.3 million youth graduate every year and about 1% are engineers. No country in the world can provide jobs to all these graduates. SMEs give them hope of light by providing them job opportunities.
Share in GDP
SMEs are a significant growth driver in India, with its contribution of 6.1% of GDP (manufacturing). The export sector in India constitutes about 40% of the contribution from SME and MSME alone. Contribution of SME to exports, manufacturing, and employment, other sectors are also being befitted.
The SMEs serve as an ancillary industry for various MNC and provide them semi-finished and auxiliary products. SMEs and MSMEs in the automobile sector is an example of such linkage. They supply clutches and brakes to MNC. SMEs also helps the government with revenues as they pay GST of 40%.
Encourages Inclusive Growth:
In India, about 50% of the total wealth is owned by just a very few people. This creates a challenge before the ministry of MSME to include the growth of the people who are deprived of the basic needs. So SME helps to include all the sections of the society by helping them to grow and providing them the job opportunity.
Simple Management Structure for Enterprises:
SMEs have a very simple organizational structure as they don’t help a large workforce so it is easy to manage and the decision making power is very good. They provide an opportunity for innovations.
SMEs depend on China for cheap raw material as the former needs to make a good profit by saving money in purchasing. But as the Government of India imposed a ban on imports, the supply chain of raw material was also hindered.Covid-19 has also given the Multinational companies option to shift their setups from China to India. This shifting could be an opportunity for SMEs and ancillaries to have a good business. The Indian government is now focusing on the try and establishing India as an alternative to the China for manufacturing for both the local and global market. International Monetary Fund (IMF) has projected the GDP growth as 1.9% and this shows the worst growth performance of India after the liberalization policy of 1991 in this fiscal year as the corona virus has disturbed the whole economy [8].
Classification of MSMEs
Classification of the MSME
New Classification (based on annual turnover)
New Classification (based on Investment)
Micro
Not exceeding Rs 5 crores
Not exceeding Rs 1 crores
Small
Between Rs 5 crores to Rs 75 crores
Not exceeding Rs 10 crores
Medium
Rs 75 to Rs 250 crores
Not exceeding Rs 20 crores
https://www.indianeconomy.net/splclassroom/new-classification-msmes/
Challenges to SMEs in India during Covid-19
Presence of e-commerce
Most of the SMEs are facing a challenge due to lockdown by the e-commerce companies like Amazon and Flipkart. Ecommerce companies are big giants. They were provided permission to supply their products, as they have a backup of man material and resources. But the SMEs don’t have the backup of raw material and finished product for delivery in this lockdown situation
Provision of Loans
In India majority of the SMEs are unregistered. They don’t have a credit history. So there is an issue in their approval of loans by the banks. They don’t have guarantees.
And the banks prefer to provide loans to existing customers.
Number of people working
SMEs of different sizes have different issues. Larger SMEs may have a backup of several months in terms of wages and raw material. But Smaller SMEs might not have a backup to last more than two months. They don’t have money to buy raw material and pay the wages to the workers. Most of them are on the verge of shutdown. On the other side micro, SMEs are more adaptive as they can change their nature of work and shift to other occupations.
Delay in the aids by the bureaucrats
As there are a large number of unregistered SMEs. The aids provided by the government don’t reach them when it is required. The process from the allotment to the delivery at the end is very time-consuming. And also the amount that reaches the needy is not the actual that was allotted. SMEs have misgivings toward the complicated processes required by the various government agencies to obtain financial relief due to a lack of explanation of the processes required, leading to delays (Chern, 2020).
Unregistered SMEs
Aids provided by the government are only for the registered SMEs. The unregistered SMEs face a severe problem due to a lack of funds and unavailability of the resources.
Receivable management
Companies engaged in receivable management are facing problem in collecting the payments from customers
Absence of sufficient finance
It has made as to the most testing limit for flawless usage and battling business segment in downsized scale part. SMEs can’t raise accounts from banks and government particularly for high hazard undertakings.
Lack of infrastructure facilities: SMEs lack the basic fundamental infrastructure facilities like offices, workforce, and water supply, road and railroad network. This brings down the development opportunity of SMEs in India.
Non-utilization of technology by the majority:
Technology plays a vital role in the success or disappointment of an enterprise. The innovation encourages SMEs to lessen its expense on manufacturing, increase profitability and productivity. However, SMEs neglect to adopt technology as it requires capital investment and they are facing an acute shortage of funds.
Working Capital
Cash is the lifeline of an enterprise. SMEs are deprived of cash flow as they have zero sales during lockdown. Lockdown created a demand for essential items but the shortage of cash didn’t permit the SMEs to took up this chance.
Suggestions to the problems faced by the SMEs
Redesign the business model
SMEs need to rethink if their business models are appropriate for the new typical, post lockdown. SMEs need to investigate new markets, new client segments, present
new products, redesign package sizes and amounts which are reasonable and applicable for the new markets and figure out what customers are happy to spend on.
Use of Technology for increasing the productivity
SMEs cannot merely depend on foreign workers to work at lower wages for their profit. Hence, SME should consider adopting new technologies, digitize their production processes, and implement e-commerce solutions to reduce cost and save resources with time.
To adopt new technologies the SMEs have to overcome the hurdles like unskilled employees, low managerial skills, knowledge acquisition to adapt to technology, capital investment, and access to finance from banks, overcome skill gaps, perceived costs. SMEs need to realize the benefits of technological adoption for their businesses, They also need to learn the marketing strategies and show their presence on social media platforms to attract a larger volume of customers.
The government should promote the use of technology in terms of approvals which today also require a traditional systems like company stamp and signing of the declaration form. Laws and regulations need to be changed to reflect and encourage digital adoption. BIS should exempt the SME from stamp duty.
Implement cashless payments
With the onset of COVID-19 the currency notes and coins have the possibility of transferring the contamination. SMEs need to adapt to the latest way of accepting payments like cashless payments, cloud-based point of sale (POS),account reconciliation packages (ARP), cashless payments using mobile e-wallets, and contactless debit and credit cards. This will increase the repayment capacity.
Formalize the informal sector
All the unregistered SME firms should register to avail of the aids that are provided by the government from time to time. The government should set special committees to aid SMEs to register and provide them a grace period for fees and tax waivers.On the other hand, a point should be reached to force the SMEs to register with the agency. All the benefits of the policies will be provided once they get registered. SMEs don’t register on account of high taxes, registering processes, technological complications, licensing costs.
Implement the high safety standards
The COVID-19 pandemic can only be faced by adopting the most hygienic workplace conditions. All SMEs should make the social distancing, use of face mask, and sanitizers as mandatory to work. To implement the guideline of the government of India for workplace operation, many of the SMEs will have to change their physical layout and some of them have to adapt to the rotation of the workforce. Some of the workforces will work in the office and the rest will work from home, this will harm the output. One other challenge to the workforce is to commute to the workplace as most of the labor will travel by bus or by train which again is a risk for the transfer of the virus. So SMEs which can work with work from home permission should consider that as a temporary solution until the risk is minimized.
This will ease the social distancing at the places which need physical access to the equipment.
Reduce bureaucratic processes
The government should form a special committee to address the issues of the SMEs
and reduce the red tape system and the cost of doing business to allow businesses to go back to their normal routine. All SMEs should be informed of all the announcements done by the government from time to time.
Referral system for loans as an alternative to KYC
Overseas banks use the referral system with the business chambers. This should be adopted by the Indian banks to facilitate the loan approval system to help the SMEs in this tough time.
Provide more electricity discounts
The government should provide a rebate of at least 50% on electricity bills to SMEs. Help This will help businesses in rented premises to negotiate rental rebates with their owners.
Implement Make in India concept
This pandemic has provided an opportunity for SMEs to make the dream project of Make in India come to reality. As the imports are banned, it will cut down the import costs.
The step towards digitization of SMEs
Having said that, technology is not just about moving with the times, but also about being more efficient. In today’s day and age, a typical small business interacts with numerous stakeholders – vendors, suppliers, customers, banks, tax return preparers, government bodies, large enterprises, distribution channels – you name it. Effectively managing all these relationships, while maintaining a high level of efficiency is a near impossibility if a business sticks to manual processes. Such a landscape essentially demands you to be comprehensive yet nimble at the same time, and the only way to change the game is to adopt automation for your business.
In this tough time when there is a crisis of jobs and unemployment is at its peak, and according to the guidelines of the government, the SMEs have to practice social distancing. To make this come to practice SMEs have to adapt to the use of technology. The extent of digitization depends on factors like the size of the firm, availability of credit, subsidy availability, and management approach.
The various technologies that can be helpful
- RFID( Radio-frequency identification) technology can be used to monitor the movement of the material and human resources. This will help in the decrease in the location time and an increase in the availability time. Workers will be available to work for more time and they can be tracked continuously. This can also reduce the delivery time of the finished products.
- Movement of business to online platform:
Develop a mobile and desktop software application so that online orders can be placed and cashless transfers can be attained. This will help to control the spread of the contamination.
- Loyalty program for the customers: SMEs can promote their sales by providing a discount code for online payments which will attract more customers to buy in large bulk.
- Introducing the automation process for the quality check to improve the quality of the product and decrease the rejection rate.
- Introducing chatbots to enhance customer experience as customer satisfaction is the key to the success of the business.
- Decrease the movement of the resources by presenting the heavy material handling equipment like the conveyor system so that there is the least movement of the workers. This will also decrease the chances of spread of contamination as a person to person contact will decrease.
- For shops, a system of self-service like we see in the ATM should be used.
- Adoption of social media like you-tube and face-book for the promotional videos, so that the customer can have the idea of the products the SMEs manufacture. The advertisements can be posted on the various social media platforms for promotional purposes.
- The movement to the cloud: By moving to the cloud, small businesses can improve their operations and productivity immensely. This will thereby, increase their profitability setting them ahead of the competition. Moving from low to medium cloud usage will have a multiplier effect of 1.5 times in improvement of productivity metrics and higher profitability with a multiplier effect of 3X after they moved from low to medium cloud usage.
References
[1] Agrawal, S., Jamwal, A., Gupta S.(2020).Effect of COVID-19 on the Indian Economy and Supply Chain.
[2] Mahendra, S., Sengupta, D.R.(2020).Covid-19: Impact on the Indian Economy.