With the fragile 60-day ceasefire between the US and Iran failing to hold, India's micro, small and medium enterprises (MSME) sector is bracing for higher energy and commodity prices, which will lead to rising input costs, according to sector lobby groups.
"MSMEs also will have to brace for the new normal,” said Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises, which represents 270 MSME interest groups across the country, referring to constant global hurdles impacting the sector, with multilateral institutions unable to contain the impact. “I think we have entered an era wherein global trade disorders may be routine," said Bhardwaj.
Some representative groups, however, say that MSMEs are resilient and that government support for shipping trade and working capital shortages can aid the sector. “Indian MSMEs have learnt to navigate global disruptions with remarkable resilience. With proactive government support and the right policy interventions, we are confident the sector will weather this challenge just as it did during the pandemic and the previous West Asia crises," said Vinod Kumar, president of the India SME Forum, which represents nearly 100,000 MSMEs.
Before the ceasefire, India's 80 million MSME businesses, of which 99% are micro with a turnover under ₹10 crore, faced the brunt of the war, and in some cases, were forced to restructure their debt as cash flows suffered.
Before the ceasefire eased supply concerns, falling oil supplies forced smaller auto businesses, primarily lubricant retailers and aftermarket service providers, to restructure loans and revise inventory strategies, Kumar of the India SME Forum had earlier told Mint.
Oil prices have already risen, with the September Brent crude contract rising to $78.70 on 9 July from $72.72 on 7 July.
On 5 May, the Centre launched the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0 to provide additional working capital to businesses struggling with liquidity stress due to the war in West Asia. More than 400,000 businesses have availed of the scheme, which aims to provide ₹2.55 trillion in additional credit for struggling businesses.
Of this, a little over ₹1.55 trillion in credit has been unlocked via approximately 411,000 credit guarantees, largely by MSMEs.
Mint's queries emailed to the Union MSME ministry remained unanswered.
Threat is real
However, according to experts, the threat to MSME operations comes as curbs are put in place for essential commodities and energy supplies.
“Before the ceasefire, India's MSMEs faced operational hurdles, often resulting in production halts. Problems arose when these businesses were unable to source essential raw materials. That uncertainty, of whether there will be supply curbs due to shortages, is the big worry at the moment, said Veeramani C., professor and director, Centre for Development Studies, a Thiruvanthapuram-based economic policy think tank.
"While higher prices of crude oil and other commodities do hamper operations by raising input costs, businesses still have the option of selling their products at higher prices, as long as supplies are consistent,” he said.
India’s MSME businesses, which contribute to 31.1% of the country’s gross domestic product, and make up 48.58% of exports, have faced one crisis after another over the last few years, starting from the covid-19 pandemic.
On 8 July, US President Donald Trump dissolved the ceasefire between the US and Iran, calling negotiations with the West Asian nation a “waste of time”, and leading to heightened uncertainty about the Strait of Hormuz, a crucial trade artery responsible for a fifth of the world’s energy trade.
His announcement comes after four months of hostilities and closure of the Hormuz, which led to energy security concerns in India, prompting the central government to put in place energy supply curbs in order to prioritize household supplies.
Prime Minister Narendra Modi in May also appealed to citizens to reduce energy consumption, gold purchases, and foreign trips.