Many small businesses weren’t shocked when Q2 FY25 GDP data revealed India’s economic growth had slumped to a seven-quarter low of 5.4 per cent, a significant drop from 8.1 per cent in the prior year’s equivalent period and 6.7 per cent the previous quarter. For them the writing was on the wall-growth has been slowing down and the world’s fifth-largest economy was running out of steam.
India’s MSME sector, initially boosted by post-COVID demand, is now experiencing a steep decline due to rising costs, weak demand, and limited access to affordable credit. MSMEs significantly contribute to the nation’s economy, generating approximately 40 per cent of manufacturing output, 22 crore jobs, and 40 per cent of exports.
The slowdown is acute, particularly in the manufacturing sector. Even Shaktikanta Das, the former Reserve Bank of India Governor, in his MPC statement dated December 5, emphasized the challenges faced by the industrial sectors across the world’s fifth-largest economy. Das mentioned that manufacturing grew at a sluggish 2.2 per cent, with weather-related events, financial market volatility, and geopolitical tensions adding considerable risks of further inflationary pressures. Going forward, he cautioned the outlook remains clouded by rising tendencies of protectionism, which could undermine global growth and drive inflation higher.MSMEs’ struggle: Rising costs, falling demand, and credit crunch
For many small businesses, problems started much before the second quarter of this fiscal and many issues are now at play.
“Economic activity began stalling as early as Q1 FY23. From Q3 FY23 onwards, consumer demand dropped phenomenally and has stagnated at more or less the same levels without showing any sign of recovery. Most MSME manufacturing enterprises have been operating at less than 50 per cent capacity utilisation since October 2022. From my personal experience and observation, never in my life over the past 37 years have we witnessed the kind of slowdown in consumption,” says Rajata Mehra, Co-convenor, CII UP MSME Panel & Director, Rajat Chemicals Industry.
Access to credit has been a perennial problem. The overall finance demand of India’s MSMEs is around $1,955 billion. Debt-based financing demand totals $1,544 billion, with informal or financially unsustainable sources accounting for half. This leaves a debt demand of $819 billion, of which $289 billion demand is currently fulfilled by formal credit lenders, like banks. The remaining unfulfilled demand of US$530 billion makes up a huge addressable market for banks, FinTechs and NBFCs.
Although the Reserve Bank of India and the Government have periodically announced measures, the credit gap for MSMEs has widened over time. “The government announced a provision for MSMEs’ credit guarantees in the budget, but nothing has materialized. If MSMEs don’t have affordable funding options, they will struggle to meet supply demands and take advantage of any future increases in demand,” he cautions. Singh highlights the need for reduced interest rates or subsidies for domestic players, similar to export incentives.
On Wednesday, the Director General of Foreign Trade, Santosh Kumar Sarangi said the department of commerce has been “struggling” to convince the finance ministry regarding the relevance of the Interest Equalisation Scheme (IES) and the extent to which it is maintaining manufacturing competitiveness.
According to Sarangi, numerous studies indicate that excessively high collateral requirements from financial institutions significantly hinder MSMEs’ access to institutional finance and export markets.
With economic uncertainty, lack of credit is having a far-reaching impact. Vikas Singh Chauhan, Director of the Home Textile Exporters Welfare Association (HEWA) says lack of cost-effective funds is derailing their plans to tap any business demand. He adds that whatever global demand exists, small firms in the home textile segment cannot capitalize on it due to the non-availability of cheaper funds. “With domestic banks failing to offer competitive interest rates, many MSMEs are turning to NBFCs, where borrowing costs are significantly higher, further eating into margins, which ultimately increases costs and expands delivery cycles from 60 to 90 days,” Chauhan adds.
Chinese flood
If domestic woes were not enough, the flood of imports from China in the last two years is having a profound impact across many sectors. Chauhan of HEWA raises concerns about the cheap Chinese imports in the domestic market, which is pushing many MSMEs to pivot from manufacturing to trading. He shares the struggles of traditional textile hubs like Solapur, Panipat, and Karur, where locally produced cotton towels are losing ground to low-quality microfibre imports.
“If export demand is less, it used to be balanced by domestic demand, but now the domestic market is flooded with cheap quality microfibre towels. This impacts the natural made cotton towels from these clusters. The Indian Market is flooded by China made goods ultimately affecting domestic demand, Many MSMEs are closing their factories and shifting to trading,” Chauhan says.
An Indore-based MSME promoter says, around 5,000 everyday use items are being imported at cheap rates from countries like China, which continue to flood the Indian market with its products. “A striking example of this issue is the small rechargeable batteries used in torches and spray pumps by farmers. In Indore alone, 150 units once manufactured these batteries, but now they’re being imported from abroad at a significantly lower cost. A product that costs Rs 100 in India is being imported for just Rs 20, with GST and import duties applied to the lower value. This has led to a dire financial situation for these units, with some even facing closure,” says this promoter.
Yogesh Mehta, President, Association of Industries Madhya Pradesh (AIMP), says, “MSMEs have lost their reserved status in government and state procurement policies, as the GEM portal has opened these opportunities to traders as well. Moreover, there have been cases where traders have exploited the GEM portal to sell Chinese products, further undermining the competitiveness of domestic MSMEs.”
Ineffective policies and corruption
Economic woes of small businesses have also exacerbated in the past couple of quarters, as many government policies have had unintended consequences. Puran Dawar, Regional Chairman, Council for Leather Exports (North), says, for example, the policy of 45-days payment to MSMEs, contrary to its intended aim, has started to bleed MSMEs as most of their suppliers are unable to honour such difficult legal tangles.
Another reason why he thinks the government schemes are not hitting the target is because freebees are big issues. “Corruption, particularly in various states, is not at all decreasing. While barriers to consumer goods imports from China are understandable, restrictions on capital goods and critical raw materials are hurting domestic manufacturers,” Dawar adds.
Similarly, Gautam Kothari, President of Pithampur Audhyogik Sangathan, emphasises the urgent need for enhanced coordination between state and central governments to simplify business processes for MSMEs. “The policy decisions should be streamlined and issues affecting small businesses should be addressed locally, rather than relying on state capitals. This would enable MSMEs to operate more efficiently and effectively, unlocking their growth potential,” adds Kothari.
“A survey conducted sometime back in the Pithampur industrial area revealed a startling inefficiency: a staggering 85 per cent of MSMEs’ time is spent on non-productive activities, with only 15 per cent dedicated to actual operations. To boost productivity, government policies should prioritise strategies that increase this 15 per cent productive time, enabling MSMEs to optimize their resources and unlock their full growth potential,” notes Kothari.
Bright spots, with caveats
Many issues stem from the fact that MSMEs often do not figure in RBIs data gathering and there is a large gap between the economic conditions of small businesses and what larger firms face. Improving data collection from MSMEs has been a persistent challenge for the government and central bank despite considerable effort.
However, not everyone in the MSME sector is entirely pessimistic. Sanjay Singh, MD of Gurgaon-based TT Textiles, says, “In terms of business demand, we’ve hit rock bottom, and I don’t see it getting bleaker from here.”
Similarly, Arun Shukla, MD of Vikramaditya engineering, a Baddi-based MSME engineering company, remains optimistic about a recovery post-election. “The economy did nosedive, but it’s a major reflection of the election period. Many spending decisions are on hold due to the political cycle. Consumers of industrial goods also postpone their decision after election results. So, the slump that RBI has mentioned will correct itself and the economy will bounce back soon. Once uncertainty clears, I expect demand to improve,” he says.
Pallavi Vyas, founder of Indore based agribusiness company Shanta Farms, sees robust demand for products in the agriculture sector in the coming times. She, however, stresses the government needs to give an impression that it’s in favour of value additions in this highly critical sector, which is fast bringing global recognition to Indian players.
The sentiment among industry leaders is clear: MSMEs are at a tipping point. While a few industry players remain cautiously optimistic, the overall tone is both concerning and sobering. MSMEs will face operational struggles and stunted growth without affordable credit, export incentives, and efficient policies.
