Credit and finance for MSMEs: A fifth of the micro, small and medium enterprise (MSME) sector by value is likely to see a jump in working capital requirement this financial year in comparison to the pre-pandemic (FY20) level, said credit rating agency Crisil on Monday according to its biannual MSME report. These MSMEs are in sectors already grappling with high working capital requirements while sectors such as dyes and pigments, construction, gems and jewellery will see a material stretch in their working capital days.
This comes amid the headwinds MSMEs, which account for around 40 per cent of India’s exports, will face from the imminent economic slowdown in advanced countries, particularly the US and Eurozone which account for a third of India’s overall exports, according to Crisil.
Pushan Sharma, Director – Research, CRISIL Market Intelligence & Analytics said that 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 around 35 days, driven by higher working capital requirement of the diamond exports sector.”
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The Ahmedabad cluster has a major presence of MSMEs in dyes and pigments, pesticides, and pharmaceuticals. The stretch in working capital here will be due to a jump in working capital days for the dyes and pigments sector for three reasons; first, inventory pile-up following dumping by Chinese producers; second, the recent earthquake in Turkey; and third, slowdown in the US. These three account for 20-25% of the total exports of dyes and pigments, pesticides and pharmaceuticals.
With respect to Surat, it is home to around 90 per cent of India’s diamond exports. Diamonds make up 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, is having a bearing on receivable days, leading to an increase in working capital days from around 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,” said Crisil.
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According to the Crisil statement citing the report, the MSME sector’s requirement for debt is estimated at more than Rs 100 lakh crore, of which around 70 per cent is for working capital requirement. However, only 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, the report said.
Assessing their working capital requirement is a challenge also because of information asymmetry and lack of high-frequency data points, it noted. The report’s analysis covers 69 sectors and 147 clusters (two-thirds of the MSME universe), which logged aggregate revenue of Rs 63 lakh crore, representing around a quarter of India’s gross domestic product last fiscal.