Micro, small, and medium enterprises (MSMEs) in India, comprising around 40% of the country’s exports, are likely to face challenges due to the slowdown in advanced economies such as the United States and the European Union (EU), according to a new report by CRISIL MI&A Research. The report revealed that nearly one-fifth of the MSME sector would experience an increase in working capital requirement this fiscal year compared to pre-pandemic levels (fiscal 2020). Conversely, other industries, including dyes and pigments, construction, gems, and jewelry, are expected to have a significant extension in their working capital days.
Ahmedabad and Surat clusters in Gujarat, which are home to several MSMEs, are anticipating an increase in their working capital days this fiscal compared to pre-pandemic levels. The Ahmedabad cluster is projected to increase by 20-25 days due to the heightened working capital requirement of the dyes and pigments sector, while the Surat cluster is expected to see a rise of 35 days, driven by the higher working capital requirement of the diamond exports sector.
The MSME Report by CRISIL MI&A Research states that the debt requirement for the MSME sector is estimated to be over ₹100 lakh crore. Of this, 70% is attributed to working capital requirements, with only a quarter of the debt sourced formally. The research report covers 69 sectors and 147 clusters, representing two-thirds of the MSME universe, and generates an aggregate revenue of ₹63 lakh crore, accounting for approximately a quarter of India’s gross domestic product in the last fiscal year.
Despite the challenges, the report highlights that understanding the working capital needs across sectors and clusters is crucial. Assessing the working capital needs of MSMEs poses a challenge due to information asymmetry and a lack of high-frequency data points. However, the Crisil MI&A Research MSME Report addresses this gap through primary research and proprietary analytics based on its extensive data pool.
The report emphasizes that liquidity benefits, such as payments on the achievement of small milestones, that MSMEs receive from the central government for the past few years as part of the Atmanirbhar package will not be available from this fiscal. The report also points out that the cost of capital from the informal segment is notably high.
In conclusion, despite the challenges faced by MSMEs in India, the report underscores the importance of addressing the working capital requirements of these businesses to boost the sector’s overall growth and development.
