Micro, small and medium-sized enterprises (MSMEs), which account for about 40 percent of India’s exports, are expected to face headwinds from the upcoming economic slowdown in developed countries, particularly in the US and the eurozone as these two regions unite Exports make up a large part of India’s total exports – almost a third.
As a result, one in five MSMEs is expected to see their working capital expand. These MSMEs are in sectors that are already struggling with high working capital needs.
There is a large presence of MSMEs in the dyes and pigments, pesticides and pharmaceuticals sectors in the Ahmedabad cluster. The slack in working capital reflects an increase in inventories following dumping from Chinese manufacturers, the recent earthquake in Turkey and a slowdown in the US. According to an analysis by CRISIL MI&A Research, these three account for 20 to 25 percent of total exports of dyes and pigments, pesticides and pharmaceuticals.
90 percent of India’s diamond exports come from Surat. Diamonds account for more than half of India’s gem and jewelry exports and a significant drop in demand from the US, the largest export market, is having a significant impact. This, in turn, is impacting accounts receivable days, leading to an increase in working capital days from around 140 before the pandemic to over 200 this fiscal year.
In the road construction sector, failure to meet last fiscal year’s planned capital spending to contain the budget deficit has increased the challenge for developers to meet working capital needs amid high commodity prices. This has resulted in a working capital cycle extension of more than 100 days this fiscal year compared to pre-pandemic levels.
In addition, the total debt requirement for the MSME sector is estimated at around Rs 100 million. However, these needs cannot be fully met by formal financial institutions as some companies are either not economically viable or voluntarily exclude themselves from formal financial services. Challenges in accessing capital include high credit risk, lack of collateral, regulatory barriers, etc. Therefore, the cost of capital is extremely high as about 70 percent of debt comes from informal sources.
According to RBI, about 80 percent of MSME sector debt in India falls into the high-risk category and non-performing assets have increased significantly, indicating a significant credit gap in the MSME sector that is hampering its growth and development.
However, progress has been made in providing access to capital for MSMEs with new initiatives such as priority sector lending standards, cluster-based lending and government schemes. However, there is a need for more enabling policies and infrastructure to support the MSME sector and its funding needs.