Majority of Startups, SMEs to scale down, shut business due to Covid: Survey

According to a survey of 6,000 SMEs and Startups conducted by the community networking platform LocalCircles, only 22% of the participants have funds for three months, whereas 41% were either out of funds or have less than 1 month of funds left, writes Krishnanand Tripathi.

New Delhi: The local lockdowns imposed by some state governments to contain the ferocious second wave in the country have adversely impacted India’s startups and SME sector as majority of them have been considering a scale down of operations, including a complete shutdown or reduction in employee benefits to sustain themselves, showed a survey.

According to a survey of 6,000 SMEs and Startups conducted by the community networking platform LocalCircles, majority of them were either considering three options: scaling down business, selling off the business or a completely shut down due to paucity of funds and uncertainty about future.

Of the 6,000 participants located in 171 districts of the country, 41% reported having funds for one month’s operation while 22% said they had funds for three months' operation.

India’s small businesses, known as the small and medium enterprises - SMEs, and startups have been in a mode of constant struggle since the start of the outbreak of Covid-19 global pandemic in March last year.

A quarter of business activity in the first quarter of the last fiscal was completely washed away as Prime Minister Narendra Modi announced a complete nationwide lockdown on March 24 last year.

“Startups and MSMEs have been in the race for survival, especially since the onset of the COVID-19 outbreak in 2020,” said Sachin Taparia, Founder of LocalCircles.

Though the economy started recovering with the start of the festive season in October-November last year and the growth in the fourth quarter of last fiscal is expected to be above 1 percent.

However, the second ferocious Covid wave, which has killed more than 1,58,000 people in April and May this year, accounting for more than half of the country’s total Covid deaths since the start of the pandemic in March last year, has severely impacted the recovery process.

The deadly virus has killed more than 3,15,000 people in the country, second highest in the world after the US where it has killed more than 6,00,000 people.

“Second wave of COVID-19 related lockdowns and curfews and their concomitant impact on the economy have once again brought along very high levels of uncertainty, struggles and challenges for Startups and MSMEs to find growth in their business and gather the necessary funds and capital to run their operations,” Taparia told ETV Bharat.

Dire situation

One of the objectives of the survey was to ascertain the current state of affairs, preparedness, and remaining cash flow of the small and business to run their operation.

The survey showed that only 22% Indian startups and MSMEs have funds for three months and 41% were either out of funds or have less than 1 month of funds left.

In response to a question about cash in hand, one third of small businesses said they had less than one month of cash remaining, whereas 8% were already out of funds, only 11% of the total 2,140 respondents of this question said they had funds for six months.

Employee benefits first casualty

The situation was even bleaker for the employees of these small businesses as nearly half of the firms said they planned to reduce employee compensation and benefits to sustain themselves.

For other expenses, 7% respondents said they would reduce advertising, marketing and new initiative costs, 9% said they would reduce employee compensation and benefits and 13% said they would reduce other fixed operational costs.

“As per aggregate response, 49% of startups or MSMEs plan to reduce their employee compensation and benefits costs by July to sustain themselves,” said the survey.

Bleak future

According to respondents, only 22% of startups and MSMEs saw growth in their business in the next 6 months while the majority of them, 59% of the total respondents, said they either expected to scale down, sell off, or shut down.

However, most of them were considering scaling down as 37% said they would scale down their operations, 14% said they might shut down, and 8% said they would sell their business off in the next 6 months.

Seeking government support

Most of the SMEs and startups sought relief from the government as a large number of them were supplying to the government or public sector undertakings.

Nearly 90% of the SMEs and startups said they wanted price escalation in the supply and contracts involving the government sector, while more than 90% asked for time extension in such contracts so that they can avoid liquidated damages.