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Published: June 27, 2023
Updated: June 27, 2023

Economic Slowdown in US and Europe to Impact Indian MSMEs; Working Capital Requirements on the Rise

The micro, small, and medium enterprises (MSMEs) in India, which account for 40% of the country's exports, are anticipated to face challenges due to the impending economic slowdown in advanced nations, particularly the United States and Eurozone. These regions contribute significantly to India's overall export market, making up one-third of its exports. CRISIL MI&A Research's biannual MSME report reveals that approximately one-fifth of the MSME sector by value is expected to experience an increase in working capital requirements in the current fiscal year compared to pre-pandemic levels.

Sector-specific Impact:

Certain sectors, already grappling with high working capital demands, will face even greater pressure. On the other hand, industries such as dyes and pigments, construction, gems, and jewellery will witness a significant extension in their working capital cycles. Specifically, export-oriented MSMEs in Ahmedabad and Surat, part of the Gujarat cluster, are projected to see a surge in their working capital days this fiscal year, primarily driven by the dyes and pigments and diamond exports sectors, respectively.

Ahmedabad Cluster:

The Ahmedabad cluster, which hosts numerous MSMEs involved in dyes and pigments, pesticides, and pharmaceuticals, will witness a rise in working capital days. This increase can be attributed to three factors: inventory accumulation resulting from dumping by Chinese producers, the recent earthquake in Turkey, and the economic slowdown in the US. These three factors collectively account for 20-25% of the total exports in the dyes and pigments, pesticides, and pharmaceuticals industries.

Surat Cluster:

Surat, responsible for 90% of India's diamond exports, is heavily impacted by a substantial decline in demand from the US, its largest export market. As diamonds constitute more than half of India's gems and jewellery exports, the decline in demand leads to an increase in working capital days from 140 before the pandemic to over 200 in the current fiscal year.

Construction-Roads Sector:

The construction-roads sector faces additional challenges due to the underachievement of budgeted capital expenditure in the previous fiscal year, aimed at controlling the fiscal deficit. Developers in this sector struggle to meet the working capital demand amidst high commodity prices, resulting in an increase of over 100 days in their working capital cycle compared to pre-pandemic levels. Furthermore, the liquidity benefits provided by the central government as part of the Atma Nirbhar package will no longer be available, further amplifying the working capital burden.

The MSME sector in India is expected to encounter headwinds caused by the economic slowdown in the US and Europe. This will lead to an increase in working capital requirements for a significant portion of the sector, particularly in sectors already facing high demands. The MSMEs in the dyes and pigments, construction, and gems and jewellery industries are likely to be significantly impacted. It is crucial to understand and address the working capital needs across different sectors and clusters, given the significant debt requirement of over Rs 100 trillion for the MSME sector. However, assessing these requirements is challenging due to information asymmetry and the lack of high-frequency data points. Efforts must be made to mitigate the effects of the economic slowdown and support the MSMEs in managing their working capital effectively.