With about 86 per cent of the currency (high denomination Rs. 500 and Rs. 1,000 bank notes) in circulation being scrapped with effect from November 9, and the replacements in the form of Rs. 2,000 and new Rs. 500 bank notes proving to be grossly inadequate, MSMEs’ businesses, especially those in the unorganised space, took a hard knock due to slump in demand.
This led to many micro and small units being temporarily shuttered, leading to job losses.
Contribution to GDP
The importance of MSMEs is underscored by the fact that units in the sector account for about 38 per cent of the total GDP.
There are about 5 crore working enterprises in the MSME segment, providing employment to about 12 crore people.
The demonetisation announcement has come as a bolt from the blue for the unorganised MSMEs, which reportedly account for almost 55 per cent of the total enterprises in the MSME segment.
Diversified financial services firm Edelweiss, in its research report Edel Pulse, said business in the case of SMEs in the unorganised sector was severely impacted in the first week (more than 70 per cent decline in business activity). But it is gradually improving.
The paper added: “However, some pain is still left. Some businesses have started to explore exports option. The barter system seems to be making a comeback. People are uncertain about the government’s actions (on Rs. 2,000 validity, fake Rs. 500 notes etc).
“The Goods and Services Tax (GST), plus the real impact of demonetisation, will follow one after the other and thus has the potential to impact businesses over the long term,” the report said.
Edel Pulse estimated permanent impact on 20-30 per cent of business in the SME-unorganised sector. It is sceptical about job situation for non-skilled workers in the near term.
Organised players safer
In the case of the SMEs in the organised space, since bulk (over 75 per cent) of business transactions are by cheque, hence the impact of cash crunch post announcement of demonetisation is minimal, said the report.
It added that impact will be limited to only about 20 per cent of business, which will also get normalised in a few months.
“Large textile companies sell products to wholesalers, who then sell them to retailers. Retail sales hit due to demonetisation (cash transactions), which will have a 2-3 months’ impact on the entire value chain. Therefore, companies expect some weakness in near-term sales (25-30 per cent impact in November),” said the Edelweiss report.
Impact on investment
Kotak Bank’s research team observed that in a predominantly cash economy the very near-term disruption due to cash crunch can lead to a significant slowdown in the SME segment, which will have a bearing on economic growth and investments.
In a report, Motilal Oswal cautioned that if the liquidity crunch at the system level continues then there could be a spike in SME bad loans (for the financial sector), which remains a key risk.
Source: The Hindu Business Line