US & Eurozone slowdown: 1 out of 5 MSMEs to see an increase in working capital days

The economic slowdown in countries such as Europe and the US would impact the Indian MSME (micro, small and medium enterprise) sector and one out of five MSMEs may see a stretch in working capital days, according to analysis in the biannual MSME report of Crisil Market Intelligence and Analytics (CMIA).

MSMEs, which account for about 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 a third of India’s overall exports.

MSMEs in dyes and pigment, gems and jewellery, and construction to bear the brunt, the report said, adding, “a fifth of the MSME sector by value is expected to witness an increase in working capital requirement this fiscal, compared with the pre-pandemic (fiscal 2020) level.”

“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 about 35 days, driven by higher working capital requirement of the diamond exports sector,” said Pushan Sharma, Director – Research, Crisil Market Intelligence & Analytics.

The Ahmedabad cluster has a major presence of MSMEs in dyes, 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 3 reasons: inventory pile-up following dumping by Chinese producers; the recent earthquake in Turkey; and the slowdown in the US. These three account for 20-25 per cent of the total exports of dyes and pigments, pesticides and pharmaceuticals.

Diamond export

As for Surat, about 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, has a bearing on receivable days, leading to an increase in working capital days from about 140 before the pandemic to more than 200 in 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.

“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 Aatmanirbhar package will not be available from this fiscal. That will further increase working capital days,” said Elizabeth Master, Associate Director – Research, Crisil Market Intelligence & Analytics.

Debt requirements

The debt requirement for the MSME sector is estimated at over ₹100-lakh crore. Of this, about 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. Also, assessing their working capital requirement is a challenge also because of information asymmetry and lack of high-frequency data points, said the report.

COMMENT NOW