Size matters. A case in point here are the small and medium-sized enterprises (SMEs).

Even though large companies have been hurt due to adverse demand conditions, SMEs have borne the brunt of most events, right from demonetization to the ongoing liquidity crunch.

“Clearly, given the credit crunch and demand slowdown, at the overall corporate level, the outlook for SMEs has moderated. Take for instance, the auto component sector which is facing a challenge in terms of rising inventory. The incremental funding needs of these companies, nearly 60% is through higher credit periods both from suppliers as well as clients. Working capital cycles are a tad higher than previous year," said Hetal Gandhi, director at Crisil Research.

Unfortunately, their financial health, which took a knock post demonetization, is still fragile.

A recent analysis of nearly 3,000 SMEs across sectors by ICICI Securities Ltd showed that sales growth has been declining for five consecutive years. Debt levels, too, have remained elevated. It should be noted that financial earnings data for these companies was available only until fiscal year 2018 (FY18).

“At a universe level of these 3,000-odd companies with total debt of 2.5 trillion, 28% by number, but 75% by total debt ( 1.9 trillion) appear to be stressed. The interest cover of this universe has dwindled from 1 time in FY13 to 0.05 time in FY18, depicting a dire picture," ICICI Securities said in a report.

Labour-intensive sectors including textiles, construction and hotels account for a large portion of this stressed debt, added the report.

Similarly, a survey by industry body Federation of Indian Chambers of Commerce and Industry for the June quarter of FY20 showed that outlook for manufacturing industry has moderated, with higher input cost playing a spoilsport. Responses for this survey were collected quarterly from large and small companies across 12 sectors including textiles, pharmaceuticals and leather products among others.

(Vipul Sharma/Mint)

The poor state of SMEs is also a consequence of lack of a significant increase in credit growth and benign private sector capital expenditure in the past few years. Additionally, the global slowdown has not helped export-linked sectors. These have come as a double whammy for SMEs.

Of course, the government is doing its bit. But that’s not enough. The expectations from the forthcoming Union budget aren’t too high either.

Gandhi of Crisil Research noted that the government’s budgetary allocation for SMEs will be 7,000 crore for FY20, which is not a significant increase from the previous fiscal year’s figure.

“What we need here is more flexibility and incentives for larger corporates to aid higher number of MSMEs to participate in formal channels. While these are some long-term steps, from the upcoming budget we expect some concessions for SMEs given the kind of funding pressures they are going through," she added. MSMEs are micro SMEs.

In short, for the health of SMEs to significantly improve, many things have to fall in place. Not only more government steps are required but also the external environment in terms of demand has to improve.