Micro, small, and medium enterprises (MSMEs), accounting for around 40% of India’s exports, will face headwinds from the imminent economic slowdown in advanced countries, particularly the U.S. and Eurozone, according to a latest report by CRISIL. These two geographies account for a third of India’s overall exports.

A fifth of the MSME sector is expected to see an increase in working capital requirement this fiscal, compared with the pre-pandemic (fiscal 2020) level, as per CRISIL Market Intelligence & Analytics’ biannual MSME report, which was released on June 26. Working capital is the fund that a business needs to meet its daily expenses and is considered to be the most liquid part of the total capital. 

The debt requirement for the MSME sector is estimated at over ₹100 lakh crore, of which around 70% is for working capital requirement. A fourth of the debt is sourced formally, while the rest is raised informally, with extremely high cost. Assessing their working capital requirement is a challenge also because of information asymmetry and lack of high-frequency data points, says the report.

The report highlights that 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, the number of days required for a business to convert its working capital into revenue.

“In the Gujarat cluster, export-oriented MSMEs in Ahmedabad and Surat are expected to see their working capital days swell this fiscal 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,” says Pushan Sharma, Director – Research, CRISIL Market Intelligence & Analytics.

The report highlighted the Ahmedabad cluster has a major presence of MSMEs into dyes and pigments, pesticides, and pharmaceuticals. This cluster is expected to see working capital stretch because of a rise in working capital days for the dyes and pigments sector. This was attributed to inventory pile-up following dumping by Chinese producers; the recent earthquake in Turkey; and slowdown in the U.S. These three account for 20-25% of the total exports of dyes and pigments, pesticides and pharmaceuticals.

As for Surat, around 90% 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 U.S., the largest export market, is having a significant impact. As a result, this will have a bearing on receivable days, leading to an increase in working capital days from nearly 140 before the pandemic to more than 200 this fiscal.

In the construction-roads sector, the underachievement of budgeted capex last fiscal — 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, the report noted.

“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,” says Elizabeth Master, Associate Director – Research, CRISIL MI&A.

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