As the US and Eurozone may face an imminent economic slowdown, Indian MSMEs will be impacted. Which businesses will feel the heat?
In the Indian economy, micro, small and medium enterprises (MSMEs) play an important role. Even though they operate on a small scale, they are the unsung heroes who contribute 40% to overall India’s exports.
But lately, a storm has been brewing for the MSME space. Let’s find out what the story is all about.
What’s Happening?
The US and the Eurozone have been important markets for India, accounting for one-third of India’s exports. But as there is a possibility of an imminent economic slowdown approaching both countries which may lead to high working capital days and a slowdown for MSMEs.
According to a CNBC TV18 report, one of every five MSMEs is expected to struggle with an elongated working capital cycle. This squeeze is particularly felt in sectors that already face high working capital requirements, and MSMEs already feel the strain on their financial health.
Which MSMEs Would See an Impact?
According to a report by CRISIL, MSMEs dealing with dyes and pigments will see an increase in the days it takes them to get money from their clients. The delay is because Chinese producers have flooded the market with much extra inventory. And secondly, the US market, a significant buyer, may see an imminent slowdown.
The next to see the impact is MSMEs dealing in diamonds and gems. You see, diamonds make up more than half of the gems and jewellery that India exports. But now, there is a big drop in demand for diamonds from the US, which is their biggest market. This means that diamond exporters have to wait longer to get paid, causing their working capital cycle to go from about 140 days before the pandemic to more than 200 days this year.
MSMEs Taking New Loans
As per the latest data from the Reserve Bank of India (RBI), bank credit of large industries saw a growth of 5.3%, while micro and small industries experienced a higher growth of 9.7%. However, medium industries surpassed them all with an impressive bank credit growth of 19.1%.
Now, because of the current problems, MSMEs may not get their payments on time, and hence they rely on bank loans and overdrafts. But, it’s hard for them to get loans from banks, and they often have to borrow money from informal sources, which is expensive. Banks consider many of these businesses risky, and they don’t have enough assets to use as collateral for loans. As a result, they are struggling to get the money they need, which is holding back their growth.
What’s Next?
The rise in prices of raw materials and the export slowdown will hurt MSMEs. But, during the pandemic too, they faced similar challenges. Hence, the government launched the Emergency Credit Line Guarantee Scheme (ECLGS), saved at least 14.6 lakh MSME accounts and prevented around 12% of outstanding MSME loans from becoming non-performing, according to Moneycontrol.
But, just as every journey has its bumps, India’s MSMEs must navigate their own challenges to achieve success.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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