One in five micro, small and medium enterprises (MSMEs) will see a stretch in working capital days in the current financial year compared to the pre-coronavirus fiscal or FY20, CRISIL Market Intelligence & Analytics’ biannual MSME Report, which was released on June 26, has said.
Working capital days is the number of days a business takes to convert its working capital into revenue.
“Micro, small and medium enterprises (MSMEs), accounting ~40% 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,” CRISIL said in a press release.
A slowdown in advanced economies is causing the stretch in working-capital days for enterprises dealing in dyes and pigments, gems and jewellery. The government's failure to meet the budgeted capital last fiscal to reign in the deficit has made it more challenging for MSMEs in the construction sectors.
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These businesses are already grappling with high working-capital requirements and the stretch in working-capital days will add to the stress. According to CRISIL’s report, the MSME sector requires a debt of over Rs 100 lakh crore, of which 70 percent is used for working capital.
Export clusters in Gujarat will be particularly affected.
Pushan Sharma, Director–Research, CRISIL Market Intelligence & Analytics said, “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 would 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 on the requirement of the diamond exports sector.
The Ahmedabad cluster is affected by the inventory pile-up following dumping by Chinese producers, the recent earthquake in Turkey and a slowdown in the US.
In Surat, from where 90 percent of India’s diamond exports emanate, would be affected by the “substantial decline in demand” from the US markets, it said. It had led to an increase in working capital days from around 140 before the pandemic to more than 200 this fiscal.
In the construction sector, MSMEs have seen an increase of more than 100 days in their working capital cycle in FY24 when compared to FY20. Besides the less-than-expected capex spending by the government, this sector’s working-capital stretch is also being caused by the stopping of incentives.
Elizabeth Master, Associate Director – Research, CRISIL Market Intelligence & Analytics, said, “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 Atmanirbhar package will not be available from this fiscal. That will further increase working capital days.”
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