Impact of CoViD pandemic on small and medium enterprises (SMES)

Sponsoring Agency

Centre for General Education Society, Ghaziabad

The Micro, Small & Medium Enterprises (MSME) sector contributes twenty eight percent to the overall Gross Domestic Product (GDP) of the country, employs hundred and ten million people, has a share of almost fifty percent of the total exports thus helping us earn valuable foreign currency. Since the MSME sector is an important contributor to the GDP, employment, and exports, it is important to understand the impact of the Covid pandemic on the MSMEs. Therefore, a study was conducted to investigate the impact of COVID Pandemic on SMEs in Telangana and Andhra Pradesh. Specifically, to examine, (1) the pain points of SMEs during the crisis period, (2) the measures initiated by SMEs to survive during the crisis period, and (3) the survival and growth strategies during crisis period.

This study adopted narrative inquiry method for data collection and data analysis. A purposive sampling method was followed to select the organizations and respondents. A list of small and medium enterprises (SME) in the state of Telangana was developed in discussion with Confederation of Indian Industries (CII), Hyderabad, and other known sources. From each selected SMEs, one senior level manager (CEO or MD or Chairman) was selected in discussion with CII and other known sources as the respondent. The respondents were asked to narrate how pandemic impacted their business. Follow up questions were asked to understand deep in the phenomenon. For example, the interviewers asked (i) could you talk on how Covid pandemic impacted your business/organization, (ii) what functional areas have suffered the most? (iii) how did you deal with the challenges in each functional area that received hard hit? (iv) what were impacts within the organization, and organization-stakeholder relations? (v) what strategies you adopted to overcome the challenges? etc. Each interview was lasted for about 30 minutes. The interviews were video recorded and transcribed. The transcriptions were analyzed following the coding technique and constant comparison method.

The data analysis adopted classic grounded theory model to reduce massive raw data to some meaningful themes. The data followed coding techniques where each sentence and paragraphs were coded followed by a clustering technique where similar codes were clustered to develop concepts. Further, concepts were clustered to develop themes. The study come up with a structural framework on ‘causality-central phenomenon-moderators-strategies-outcome’.

The causality of the SMEs business disruption (central phenomenon in this study) was twofold. One, the pandemic itself, and the other, the government regulations.

Pandemic: The pandemic had created a panic and fear among all the people in the SMEs, starting from the top management to the contractual workers. A fear of infection and contamination deterred employees to join office and factory. The internet audio-visuals, government reports and television advertisements & news panicked workers. They preferred isolation. Restrictions on travel, people movement, etc. has created issues for business, especially to hire and train employees.

Regulation: The government regulation, especially the lockdown and movement restrictions was the major cause of dysfunction of the entire ecosystem of business. The business of SMEs, either manufacturing or service, dependent on the business ecosystem, including customers, suppliers, distributors, and company employees. The regulations were imposed on all the actors of the ecosystem. In the first wave of pandemic, general citizens had tremendous fear for even for coughing or sneezing or fever. If the general cold symptoms are visible, they will be captured by municipal (or government) authorities, and forcefully they will be taken to isolation. Therefore, no one wanted to go to any work place even if government some relaxations to some kind of business.

The Central Phenomenon described the Covid Pandemic impact on Business. The factors which explain to the central phenomenon, i.e., the impact of Covid pandemic on SMEs were raw materials and import constraints, employee retention issues, falling consumers spending, logistic and supply chain malfunction, nonalignment between business format and covid protocol, nonalignment between business format and Covid protocol, exports issues, and managing fixed cost and large employee base.

Raw materials and import Constraints: The significant hit to the business was the siege of supplies of raw materials. Soon after the Pandemic transportations were halted. State and country boarders are sealed. Businesses which dependent on imports of raw materials have to count on the past supplies. There were restrictions in e passes. Also, the SMEs who are dependent on multiple type of raw materials suffered seriously.

Employee retention Issues: Employees were scared both for the Covid pandemic as well as their job security. Many workers who were from different states have decided to leave for their state. Workers from other districts and villages also left for their homes. One side, there was a fear and panic of Covid infection and death, and the other side risking the job. Workers apprehended that they will lose their job as the Pandemic progress, therefore they will risk their livelihood. This induced fear triggered employees to migrate to their natives. There were instances where workers have left job and did not come back even after having assured salaries from the employer.

Falling Consumers spending: The consumer spending has been significantly hurt. The new investments suffered a lot due to countrywide lockdown. Some investments were interrupted in-between. The B to B format of business had significant impact too. Many customers cancelled orders. Consumer goods market received a serious hit as retailers had to lockdown the outlets. Customers were bound to cut down consumptions. All happened in a chain reaction, capital goods producers cut down productions due to a fall in consumption demand, which impacted adversely to the suppliers of consumer goods producers.

Logistic and Supply Chain Malfunction: The pandemic created a havoc in the logistic and supply chain of SMEs. The SMEs did not plan for such an impactful uncertainty. The traditional supply chain methods followed by SMEs were disrupted. Things were worse when clients were located in faraway places and the supplies were all ready to dispatch.

Nonalignment between business format and Covid protocol: It was difficult for some SMEs to align fully with the Covid protocol, especially the social distancing due to the nature of the business. Manufacturing SMEs had situations where workers have to work in close groups. In those formats, the SMEs faced difficulties to open the business and retain workers. In other cases, the management kept on providing Covid compliance instructions but there were instances where workers took them lightly and management was unable to track fully.

Exports: The exports were affected as the country boarders were locked. There were mixed results. While IT based software developing SMEs did well with exports, the manufacturing SMEs did not do well.

Managing fixed cost and large employee base: It was very difficult to manage SMEs who has very high fixed cost and large employee size like textile business. Managing employee salary was a big issue as the factory was shut down for a longer period. Depreciation kept on accumulating and on the top of it a salary expenses added up.

Government support had moderated to the central phenomenon of the Covid impacts. SMEs had no significant expectation from government except extension of credit lines for working capital support. The credit lines improved the liquidity and enable them to manage the operating cost. Also SMEs have some apprehension that government may come out with difficult compliances which further worsen the situations. Some other SMEs had expressed a different experience. They did not find the government really reaching SMEs and helping them in the pandemic. SMEs who service government organizations got punishments on service delivery irrespective pandemic. They expected Government should consider certain aberrations due to the Pandemic as most restrictions were imposed by Government. Even if the government extended credit supports, some SMEs were sceptical to continue production as market started shrinking to a large extent. SMEs feared that if the market does not respond positively then payment of the loans will be difficult.

However, SMEs had undertaken various strategies to tackle the Covid issues. The strategies were, trust building, support system building, vaccination drive, and business model reengineering.

Trust building: The trust building between employer and employee was the major challenge. Some business were able to retain employees and stopped them fearfully moving to their natives by building significant trust, while some other business lost significant number of employees. The major strategy to retain employee was the trust building by signalling ‘we are with you’ and ‘don’t fear, we will help you’. Standing by the workers built tremendous trust and confidence among the workers. There were many sets of fear among the workers. For example, working with the co-worker. Nobody knows who is infected and who is not. In such a circumstances employees felt like abandoning the workplace fearing that the co-workers may be infected. To eliminate this fear businesses adopted Covid protocols and secure workplace behaviour like sanitizing office buildings, factories, etc. every day, thermal scanning of employees, maintaining social distances, working with less than fifty percent staff on each day, etc. Another tactic that built trust among the employees was ‘payment of full salary during the shutdown’. While the factory or business was lockdown, the employees were paid full salary. This tactic built the both cognitive trust (our company will not bankrupt as it is capable paying us salary during the factory lockdown), and affective trust (our management have concerns for us. We are paid even when we are not working in the factory or from home). A feel and concerns for employees have improved the affective trust. SMEs adopted technologies to remain in contact with employees. They constantly conversing with employees and hearing their voices. They have showed empathy as well as they kept on counselling and guiding employees. When employees received one to one counselling from business owners/management, they felt elated. They realized that their organization care for them.

Building trust between SMEs and their clients was an important tactic to survive the market in the Pandemic. SMEs have adopted this tactic sooner than later. For the same SMEs attempted to more communicative and transparent to win the trust of their clients.

Support systems: Building a support system was the key strategy to tackle the pandemic for some business. Very soon businesses have adopted ‘work from home’ strategy. However, the business who provided further support system, were able retain a growth during the pandemic time.

Vaccination Drive: Most of the SMEs have started the vaccination drive in their organization. It was a significant pull factor for the organization. When workers were struggling to get the vaccinations in government or private hospitals and rush among the crowds, SMEs have created a well and secure ambiance for vaccination at their own cost. This developed a mental satisfaction among the employees.

Business Model Reengineering: Some SMEs have reworked on their business model in terms of transforming fixed cost model to variable cost model. They carefully analysed the fixed costs which can be eliminated by outsourcing models. These models improved the business performance significantly. Further important management models like zero based budgeting, use of technology, especially IT have improved business performance, and changing the credit periods.

However, the Covid pandemic led to three important outcomes, i.e. revenue and profit shrinkage, incurring a high employee retention cost, and shutdown and slowdown of the business.

Revenue and profit shrinkage: The Covid pandemic eaten away margin as well as working capital of most SMEs. Supplies could not reach to the customers due to transport restrictions and complications in e pass issues. SMEs experienced a shrinking profit and working capital shortage for many reasons. The payments of supplies got delayed, supplies could not reach to the clients, and factories productions were scaled down with less staff, delay in receiving raw materials. The travel restrictions seized the movement of people. The quality control inspectors could not visit warehouses and factory locations to inspect the finish products. This led pilling up of finished goods. The carrying cost shoot up. The unsold goods created a cash crunch for working capital requirement. Therefore, the balance sheet was impacted badly.

Employee retention cost: The employee retention was a major issue for SMEs. Some SMEs even increased salary for their workers to retain them. This led to a higher employee cost to the company.

Factory/business shutdown/slowdown: The inbound logistics have faced significant hit. SMEs require several supplies for production. All supplies must reach in right time to ensure production. As the suppliers were also impacted, supplies have been interrupted, both production of the supplies as well as inbound logistics of the supplies. This phenomenon caused temporarily shutdown of factories. Some SMEs experienced resentment and unhappiness from their customers too.

At the end, the study developed thirty cases lets illustrating the voice and emotion of the SMEs. The study findings can significantly contribute to the policy makers to deal with the current state of SMEs and their sufferings, and help them to devise suitable and effective policies to improve the performance of SMEs in India.

Research Team

Dr. Debadutta Kumar Panda

Dr. Sriharsha Reddy

Dr. Tulika Sharma

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