Small and medium-sized enterprises (SMEs) in India have been hit particularly hard by the pandemic due to trickling revenues, withering credit lines, and a depreciating rupee. Active COVID-19 cases in India are falling but risks of a second wave remain. To address this issue, the Indian government earmarked about US$40.8 billion in emergency credit guarantees for SMEs as part of its US$265 billion stimulus package in May. Less than half of this amount (about US$17.1 billion) has been disbursed as of October 1.

Our view: Although the government has provided a portion of the earmarked loans to SMEs to help them navigate the current credit crunch, those loans have been dispersed unevenly. A substantial number were provided to larger SMEs because banks remain reticent to extend credit to smaller companies, even when the loans are fully guaranteed by the government. As the pandemic continues to spread at a rapid pace in India, we expect financial institutions to continue exhibiting this behavior, so credit conditions for smaller SMEs are likely to remain especially tight along with short-term disruptions that will have significant economic ramifications across industries.

Business implications: Large case counts and muted confidence will drive growth contractions well into 2021, so executives should plan for significant pressure on consumer spending and investment until halfway through next year. The Indian economy is not likely to return to pre-pandemic levels before 2022, though some more expected government support for manufacturing and an intensifying protectionist stance may lead to limited gains for domestic production.

Strategic Priorities for Executives

  1. Use scenarios to align internally and undertake contingency planning
  2. Monitor subnational-level opportunities for growth
  3. Engage with government officials to get ahead of potential disruptions due to changes in lockdown restrictions
  4. Reassess your market and customer segment prioritization
  5. Expect heightened protectionist measures by the government, particularly toward Chinese imports

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