The impending economic slowdown in advanced nations, particularly the US and Eurozone, is expected to have an adverse effect on micro, small, and medium-sized enterprises (MSMEs), which account for about 40% of India’s exports. This is because nearly one-third of India’s total exports are to these two regions.
As a result, one out of every five MSMEs is anticipated to have a delay in its working capital days. These MSMEs operate in industries where a lot of operating capital is already needed.
MSMEs that produce dyes and pigments, insecticides, and pharmaceuticals are particularly prevalent in the Ahmedabad cluster. The working capital stretch is anticipated as a result of a stockpile following producer dumps in China, the recent earthquake in Turkey, and a slowdown in the US. According to a study by CRISIL MI&A Research, these three make up 20–25 percent of all exports of pharmaceuticals, insecticides, and dyes and pigments.
Surat is the origin of 90% of India’s diamond exports. More than half of India’s gem and jewellery exports are diamonds, and the biggest export market’s sharp decrease in demand is having a big impact. This is having an impact on receivable days, which are increasing working capital days from 140 prior to the pandemic to over 200 this fiscal year.
The lack of anticipated capex last fiscal year, which was intended to reduce the fiscal deficit, has made it harder for developers in the construction-roads sector to meet working capital demands in the face of rising commodity prices. As a result, their working capital cycle has lengthened by more than 100 days this fiscal year compared to pre-pandemic levels.
The entire amount of loan required by the MSME sector is also projected to be over Rs 100 lakh crore. The formal financial institutions cannot, however, meet the entire demand since some businesses are either not commercially viable or choose to forego formal financial services. High credit risk, a lack of collateral, regulatory restrictions, and other issues make it difficult to get finance. The cost of capital is therefore very high because around 70% of the debt comes from unofficial sources.
The MSME sector’s growth and development are being hampered by a substantial credit gap, according to the RBI, which suggests that around 80% of India’s MSME sector debt is in the high-risk category and the number of non-performing assets has significantly increased.
With new initiatives including priority sector lending criteria, cluster-based lending, and government programmes, there have been improvements in MSMEs’ ability to access finance. The MSME sector and its finance requirements do, however, require more supportive policies and infrastructure.
