Export headwinds increase MSME working capital needs: report

Micro, small and medium-sized enterprises (MSMEs), which account for about 40% of India’s exports, will face headwinds from the upcoming economic downturn in advanced economies, particularly the US and the eurozone. These two regions account for a third of India’s total exports.

Analysis by CRISIL MI&A Research, included in the semi-annual MSME report, shows that one-fifth of the micro, small and medium-sized enterprise (MSME) sector by value is expected to see an increase in working capital needs this fiscal year compared to the pre- Pandemic (FY 2020) level.

These MSMEs are in sectors that are already struggling with high working capital needs. On the other hand, sectors such as dyes and pigments, construction, gemstones and jewelry will see material utilization in their working capital days.

Pushan Sharma, Director – Research, CRISIL Market Intelligence & Analytics, said in a statement, “In the Gujarat cluster, working capital days of export-oriented MSMEs in Ahmedabad and Surat are expected to increase this fiscal year compared to pre-pandemic levels.” The Ahmedabad cluster will see an increase of 20-25 days, driven by an increase in the working capital needs of the dyes and pigments sector, and the Surat cluster by about 35 days, driven by the higher working capital needs of the diamond export sector. ”

There is a large presence of MSMEs in the dyes and pigments, pesticides and pharmaceuticals sectors in the Ahmedabad cluster.

The working capital overrun here will be due to an increase in working capital days for the dyes and pigments sector due to three reasons: inventory build-up following dumping by Chinese manufacturers; the recent earthquake in Turkey; and slowdown in the US. These three countries account for 20-25% of total exports of dyes and pigments, pesticides and pharmaceuticals.

As for Surat, about 90% of India’s diamond exports come from there. 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.

Elizabeth Master, Associate Director – Research, CRISIL Market Intelligence & Analytics says: “Cash flow benefits, such as small milestone payments, that MSMEs in the road construction sector have been receiving from the central government for a number of years.” Part of the Atmanirbhar package will be released this fiscal year not be available. That will continue to increase working capital days.”

The debt requirement for the MSME sector is estimated at over Rs. 100 lakh crore, the MSME report said. Around 70% of this is accounted for by working capital requirements. A quarter of the debt is officially raised. The cost of capital from the informal segment is extremely high. Therefore, it is crucial to understand working capital needs across sectors and clusters, the report says.

Determining their working capital needs is also challenging due to the information asymmetry and lack of high-frequency data points.

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