Amid A Correction In Input Prices, India's Small Businesses Find Some Relief

"It's like working for a loss," AK Balaji, who runs a small foundry in Andhra Pradesh, had told BQ Prime in an interview in March. Fast forward to three months and the relief is palpable. "At least, the losses are covered," he says. What's changed? Commodity prices.

From metals to agricultural commodities, prices have seen a correction in recent months after some touched all-time highs in March this year.

The decline in global prices has ranged between 10% and 26% for base metals including aluminum, copper, iron ore and nickel in June 2022 compared to March this year.

As prices of inputs spiked, micro, small and medium enterprises found themselves unable to pass on the higher costs to their end customers. Now, a reversal in prices has offered some respite.

The correction in commodity prices has allowed micro and small enterprises to heave a sigh of relief, Sushma Morthania, director general at the India SME Forum, said.

The problem was not so much the rise in prices, but the fact that prices were going up daily, Rakesh Chhabra, vice president of the Federation of Indian Micro and Small and Medium Enterprises said. The rise in costs was not at a pace commensurate with the changes in sale prices. "We are hoping that era is over," Chhabra said.

To be sure, not all prices have corrected. Brent crude prices, while off their highs, were still 4.5% higher on an average in June, compared to March this year.

The elevated crude prices means that petroleum products and plastics remain costly. Packaging costs remain high as well.

Should prices remain in check, the benefits will trickle through to small businesses more completely.

Chandrakant Salunkhe, founder and president, SME Chamber of India, said that the fall in commodity prices is yet to be passed on commensurately to SMEs purchasing raw materials from industries at large. Also, finding labour continues to be a problem and interest rates have begun to rise adding to the industry's challenges, Salunkhe said.

Suman Chowdhury, chief analytical officer at Acuité Ratings and Research, said that it is too early to expect the decline in commodity prices to reflect in SME margins. If anything, because of the rise in logistics costs, pressure on margins is expected to rise, he said.

The second order impact of high inflation, too, is beginning to be felt in SMEs with wages going up, Chowdhury said.

SMEs where raw material costs comprise a large part of the firms' input costs might see some benefit from the correction in commodity prices, but, other SMEs where value addition is high and other costs are relevant are likely to see muted impact on margins from a reduction in commodity prices, Chowdhury explained.

Besides, SMEs usually stock inventory and, hence, are unlikely to have benefited significantly from the recent fall in prices, he said.