Small businesses, which account for almost 40% of exports, will face headwinds from the imminent economic slowdown in advanced countries, particularly the United States and Eurozone, according to a report.
According to a Crisil analysis, one in five micro, small, and medium enterprises will also see stretched working capital. The U.S. and EU markets account for a third of the country's overall exports.
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The analysis shows a fifth of the MSME sector by value is likely to witness an increase in working capital requirements this fiscal compared to pre-pandemic levels.
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These MSMEs in different sectors—dyes and pigment, gems and jewellery, and construction—are already grappling with high working capital requirements.
The analysis covers 69 sectors and 147 clusters, which constitute two-thirds of the MSME universe, logging aggregate revenue of Rs 63 lakh crore, representing around a quarter of the gross domestic product last fiscal.
According to Pushan Sharma, a director with the agency, export-oriented MSMEs in Ahmedabad and Surat are expected to see their working capital days swell this fiscal compared to 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 the higher working capital requirement of the diamond exports sector.
The Ahmedabad cluster has a major presence of companies 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; and a slowdown in the U.S. These three account for 20–25% of the total exports of dyes and pigments, pesticides, and pharmaceuticals.
As much as 90% of diamond exports emanate from the Surat cluster, and diamonds constitute more than half of gem and jewellery exports. A substantial decline in demand from the U.S., the largest export market, is having a major impact. That, in turn, is having a bearing on receivable days, leading to an increase in working capital days from 140 before the pandemic to over 200 now.
In the construction and road sectors, the underachievement of budgeted capex last fiscal to rein in the fiscal deficit has added to the challenges of meeting working capital demand amid high commodity prices. This has led to an increase of over 100 days in their working capital cycle this fiscal compared to pre-pandemic levels.
According to Elizabeth Master, an associate director with the agency, liquidity benefits, such as payments on the achievement of small milestones, that MSMEs in these sectors have been receiving from the Centre for the past few years as a part of the infra push will not be available this fiscal. This will further increase working capital days.
The debt requirement of MSMEs is estimated at over Rs 100 lakh crore, of which 70% is working capital and only a fourth is sourced formally.
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