MSMEs to face headwinds due to economic slowdown in US, Europe: CRISIL

A fifth of the MSME sector by value is expected to witness an increase in working capital requirement this fiscal, the report said

Micro, small and medium enterprises (MSMEs), accounting 40 per cent of India’s exports, will face headwinds from the imminent economic slowdown in advanced countries, particularly the US and Eurozone. These two geographies account for one-third of India’s overall exports.

An analysis by CRISIL MI&A Research, said in its biannual MSME report, that a fifth of the MSME sector by value is expected to see an increase in working capital requirement this fiscal year, compared with the pre-pandemic level.

These MSMEs are in sectors already grappling with high working capital requirements. On the other hand, sectors such as dyes and pigments, construction, gems and jewellery will see a material stretch in their working capital days.

 

Pushan Sharma, Director – Research, CRISIL Market Intelligence & Analytics, said in a statement, “In the Gujarat cluster, export-oriented MSMEs in Ahmedabad and Surat are expected to see their working capital days swell this fiscal year compared with the pre-pandemic levels."

"The Ahmedabad cluster will see an increase of 20-25 days, driven by a rise in the working capital requirement of the dyes and pigments sector, and the Surat cluster by 35 days, driven by higher working capital requirement of the diamond exports sector," he added.

The Ahmedabad cluster has a major presence of MSMEs in dyes and pigments, pesticides, and pharmaceuticals. The working capital stretch here will be because of a rise in working capital days for the dyes and pigments sector for three reasons:

• Inventory pile-up following dumping by Chinese producers
• The recent earthquake in Turkey
• Slowdown in the US

These three account for 20-25 per cent of the total exports of dyes and pigments, pesticides and pharmaceuticals.

As for Surat, 90 per cent of India’s diamond exports emanate from there. Diamonds constitute more than half of India’s gems and jewellery exports and a substantial decline in demand from the US, the largest export market, is having a significant impact. That, in turn, is bearing on receivable days, leading to an increase in working capital days from 140 before the pandemic to more than 200 this fiscal year.

In the construction-roads sector, underachievement of budgeted capex last fiscal year— to rein in fiscal deficit — has added to the challenges of developers in meeting working capital demand amid high commodity prices. This has led to an increase of more than 100 days in their working capital cycle this fiscal, compared with pre-pandemic levels.

Elizabeth Master, Associate Director – Research, CRISIL Market Intelligence & Analytics said, “Liquidity benefits, such as payments on the achievement of small milestones, that MSMEs in the construction-roads sector have been receiving from the central government for the past few years as a part of the Atmanirbhar package will not be available from this fiscal. That will further increase working capital days.”

The debt requirement for the MSME sector is estimated at over Rs 100 trillion, the MSME report said.

Of this, 70 per cent is for working capital requirements. A fourth of the debt is sourced formally. The cost of capital from the informal segment is extremely high. Thus, understanding the working capital needs across sectors and clusters is critical, the report said.

Assessing their working capital requirement is a challenge also because of information asymmetry and lack of high-frequency data points, it added.