Title: The Impact of US and EU Slowdown on Small Businesses: A Crisil Report
Introduction:
The US and EU economic slowdown is expected to have severe repercussions on small businesses, particularly in India. According to a recent report by Crisil, a leading credit rating agency, approximately 20% of micro, small, and medium-sized enterprises (MSMEs) will face significant challenges, with extended working capital requirements due to declining exports. This article delves into the implications of the US and EU slowdown on small businesses and provides insights into specific sectors affected.
1. Small Businesses and Exports:
Small businesses are an integral part of the economy, accounting for nearly 40% of India’s total exports. Therefore, any adverse impact on advanced economies like the US and Eurozone will directly affect these businesses. The US and EU markets collectively contribute to about one-third of India’s total exports.
2. Increased Working Capital Requirements:
Crisil’s analysis reveals that one-fifth of the MSME sector by value is likely to experience an increase in working capital requirements compared to pre-pandemic levels. This fiscal year is expected to present greater challenges for these businesses, further straining their financial resources.
3. Sector-wise Analysis:
The Crisil analysis covers 69 sectors and 147 groups, encompassing two-thirds of the MSME universe. Some of the sectors already grappling with high working capital requirements include dyes and pigments, gems and jewelry, and construction. These sectors have been significantly impacted by the economic slowdown in the US and EU markets.
4. Ahmedabad and Surat Clusters:
Export-oriented MSMEs in Ahmedabad and Surat are expected to witness an increase in their working capital days compared to pre-pandemic levels. In the Ahmedabad region, the dyes and pigments sector, affected by inventory buildup after dumping by Chinese producers, recent earthquake in Turkey, and a slowdown in the US, is leading to a 20 to 25 days increase in working capital requirements. Surat, known for its diamond exports, is experiencing a decline in demand from the US, causing a similar 35-day increase in working capital requirements.
5. Construction and Highway Sector:
The construction and highway sector is facing challenges in meeting the demand for working capital due to underperformance of capital spending in the last fiscal year. Budget constraints and high raw material prices have contributed to an increase of over 100 days in the working capital cycle compared to pre-pandemic levels.
6. Implications for MSMEs:
The liquidity benefits, such as small milestone payments, that MSMEs in these sectors have been receiving from the government will not be available, worsening the working capital situation. With an estimated MSME debt requirement of over Rs 100 lakh crore, only a quarter of which is formally raised, MSMEs will face significant financial strains.
Conclusion:
The US and EU economic slowdown is poised to have a crippling impact on small businesses, particularly in export-oriented sectors in India. The decline in exports to these advanced markets is expected to increase working capital requirements, placing substantial financial strain on MSMEs. Sectors such as dyes and pigments, gems and jewelry, and construction are already grappling with challenges in meeting their working capital needs. It is crucial for policymakers and stakeholders to provide support and initiatives to ensure the resilience and survival of these small businesses in the face of economic headwinds.
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According to a Crisil analysis, one in five MSMEs will also see extended working capital. The US and EU markets account for a third of the country’s total exports.
Small businesses, which account for nearly 40 percent of exports, will face headwinds from the impending economic slowdown in advanced countries, particularly the US and the Eurozone, according to a report.
According to a Crisil analysis, one in five MSMEs will also see extended working capital. The US and EU markets account for a third of the country’s total exports.
The analysis shows that one-fifth of the micro, small and medium-sized enterprise (MSME) sector by value is likely to see an increase in working capital requirements this fiscal year compared to pre-pandemic levels.
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These MSMEs in different sectors (dyes and pigments, gems and jewelry, and construction) are already dealing with high working capital requirements.
The analysis covers 69 sectors and 147 groups, constituting two-thirds of the MSME universe, recording aggregate revenue of Rs 63 lakh crore, which is around a quarter of the gross domestic product of the last fiscal year.
According to Pushan Sharma, director of the agency, export-oriented MSMEs in ahmedabad and surat Its working capital days are expected to increase this fiscal year compared to pre-pandemic levels.
The Ahmedabad group will see an increase from 20 to 25 days, driven by an increase in the working capital requirement of the dyes and pigments sector, and the Surat group in 35 days, driven by the higher working capital requirement of the diamond export sector.
The Ahmedabad cluster has a significant presence of dye and pigment, pesticide and pharmaceutical companies.
The working capital expansion here will be due to an increase in days of working capital for the dyes and pigments sector for three reasons: inventory buildup after dumping by Chinese producers; the recent earthquake in Türkiye and a slowdown in the United States. These three represent 20 to 25 percent of total exports of dyes and pigments, pesticides, and pharmaceuticals.
Up to 90 percent of diamond exports come from the Surat group, with diamonds making up more than half of gem and jewelry exports, and a substantial decline in demand from the US, the world’s largest export market. big, is having a major impact. That, in turn, influences days to be paid, leading to an increase in days of working capital from 140 before the pandemic to more than 200 now.
In the construction and highway sector, the underperformance of capital spending budgeted in the last fiscal year to control the fiscal deficit has added to the challenges in meeting the demand for working capital amid the high prices of the raw Materials. This has led to an increase of more than 100 days in its working capital cycle this fiscal year compared to pre-pandemic levels.
According to Elizabeth Master, the agency’s associate director, the liquidity benefits, such as small milestone payments, that MSMEs in these sectors have been receiving from the Center for the past few years as part of the infrastructure push will not be available to from this prosecutor. This will further increase working capital days.
The MSME debt requirement is estimated to be over Rs 100 lakh crore, of which 70 per cent is just working capital and only a quarter of this is formally raised.
First published in: 2023-06-26 17:01 IST
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