India’s Small Businesses Are Facing An Existential Crisis, Says Crisil
The contraction expected in the Indian economy due to Covid-19 pandemic pose insurmountable challenges for MSMEs, Crisil says.
The contraction expected in the Indian economy this year due to Covid-19 pandemic could pose insurmountable challenges for small businesses, according to Crisil Research.
Micro, small and medium enterprises in India are expected to see an up to 21% decline in revenue and their operating margin could shrink to less than 5% due to weak demand, Crisil said in a media statement. “A sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front.”
India’s economy came to a grinding halt over the last three months as the nationwide lockdown to curb the virus spread shuttered shops and factories alike, decimating consumption.
While the economy is now slowly reopening, a return to normalcy appears distant. Most economists expect the economy to contract in the ongoing fiscal. Crisil estimates a 5% fall in India’s GDP.
And companies will also find it harder to service their debt. The average interest service coverage ratio could slide 1-1.5 times during the fiscal compared with 2.4 times seen between 2017 and 2020. This will be despite the extended loan moratorium announced by the Reserve Bank of India, Crisil said.
Smaller units will be the worst hit as micro enterprises account for a third of the overall MSME debt.
Historical data, too, suggests that MSMEs struggle to manage transient working capital challenges during economic downturns, Crisil said.
The big issue, though, is revival of demand.
“The current facilitations may not have the heft to crank up demand in the near term because fiscal stimulus is limited and only to vulnerable households,” said Amish Mehta, chief operating officer at Crisil. “It’s critical that the demand curve is yanked steeply northwards, especially in discretionary products and services.”
Mehta suggests a three-pronged strategy to revive demand quickly. First would be to improve the sentiment around job security which in turn will help boost consumption. Second is to speed up the implementation of the Rs 3 lakh crore liquidity provision for MSMEs in the government’s Aatmanirbhar package. Thirdly, he urges lenders to go beyond traditional credit processes through closer interactions with MSMEs and enabling them to recover.
Worst-Hit Sectors
Crisil expects consumer discretionary, construction and export-linked sectors to bear the brunt of the downturn. Small real-estate contractors, ceramics and tilemakers will also be significantly impacted.
“Revenue growth of MSMEs in the real estate engineering, procurement and construction segment could almost halve with demand sliding even as rising costs, supply chain disruptions and labour issues exert severe pressure on margins,” Crisil said.
A survey of MSMEs by Crisil showed that the ones in upstream sectors like construction, auto manufacturing and component makers don’t expect a rebound before financial year 2022. Consumer goods distributors, on the other hand, are expecting contraction due to supply-side challenges and consumers spending less on products.