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Digitisation, phased lockdowns: Why Indian MSME ecosystem is more resilient in 2021

The analysis by fintech startup Khatabook found that MSMEs in Kerala, Madhya Pradesh were the most impacted, and those in Telangana, Bihar among least impacted in the first half of 2021.

Micro, small and medium enterprises (MSMEs) across the country experienced an average decline of 11% in business activity due to the lockdowns in 2021 compared to 46% during the 2020 nationwide lockdown, thereby showing enhanced resilience. This is because unlike the nationwide lockdown in 2020, the lockdown remained phased and localised for the second wave of COVID-19 in 2021 across the country. This was revealed in the ‘2021 Mid-year Covid Impact' analysis on the MSME segment in the country conducted by fintech startup Khatabook.

“Lockdowns and restrictions have a direct impact on MSME business activity. The lockdowns in 2021 are in line with the increasing COVID cases. Hence, there is a direct link between the number of cases increasing and the decline in business activity in 2021,” the study notes. 

The platform indicates the gradual decline in business activities from March 2021 and a sudden spike in the activities towards mid-June 2021 when the states started easing the lockdown restrictions. However, the MSME segment is yet to achieve full recovery to the pre-COVID levels of March 2020.

As per the analysis, MSMEs across all the tiers have experienced more or less the same impact throughout the pandemic. However, tier 1 and 2 cities were relatively less impacted during the second wave as compared to metros, tier 3 and tier 4 cities.

MSME ecosystems in Jharkhand, Telangana, and Bihar were the least impacted states in the first half of this year while Uttarakhand, Kerala, and Madhya Pradesh were the most impacted. Madhya Pradesh, incidentally, was also one of the most impacted states last year.

Between January 2020 to June 2021, Delhi and UP, Haryana and Delhi and Andhra Pradesh and Telangana exchanged the highest interstate trade with each other. Individually, Delhi, UP, and Maharashtra had the highest levels of ongoing interstate business activities, the study found.

Textile/apparel and footwear, automobiles, and traders continue to be the most sensitive categories to COVID-19 induced lockdowns this year as well. While there is a growth in business recovery from 2020 to 2021 for these categories, they remain the MSME categories that will need close attention. Health, grocery, transportation, and agriculture are the categories that continued growing in 2021 despite external circumstances.

The MSME business resiliency, in part, can be attributed to digitisation. The trend of accelerated digital adoption from 2020 continues in 2021. However, what's unique this year is the way MSMEs are using digital platforms, the study notes.

The usage of in-app features per user has increased by 72% over the last year, indicating that MSMEs have started making use of the full functionality of digital solutions. The steady increase in in-app feature utilisation shows that small businesses are not just adopting digital mode but also becoming more proficient with its usage. 

These insights are based on the high-level cash flow and business activity analysis of the MSME ecosystem represented by the Khatabook app, assessing the overall impact on businesses during the phased lockdowns across the country by region and category.

"The MSME ecosystem is more resilient in 2021. Phased lockdowns and MSME preparedness for external circumstances with digital adoption seem to have contributed to business strength. However, with lockdowns and restrictions being a constant reality in the pandemic world, cash flow management will be a defining factor for MSME business success moving forward," said Ravish Naresh, Co-founder and CEO, Khatabook. He added that the MSME segment is showing a definite learning curve with its usage behaviour of digital platforms, indicating increased proficiency with digital solutions