US reciprocal tariffs to exacerbate stress for Indian MSMEs: Ind-Ra
US reciprocal tariffs will exacerbate stress for Indian micro, small and medium enterprises (MSMEs) with moderate to high intensity, India Ratings and Research (Ind-Ra) recently cautioned.
MSMEs with revenue below ₹2.5 billion (~$296.6 million) and investment in plant and machinery below ₹50 million as of March 31, 2024, are counted.
US reciprocal tariffs will exacerbate stress for Indian MSMEs with moderate to high intensity, India Ratings and Research (Ind-Ra) recently cautioned. Ind-Ra expects Indian MSMEs to turn more vulnerable, especially entities in the sectors where the impact of tariff war is negative. It believes that any demand slowdown could impact MSMEs more than mid-sized corporations.
The credit profile of these entities has reverted to pre-COVID level, but the improvement has lagged that of companies whose revenue ranges between ₹2.5-10 billion.
With the worsening of operating conditions owing to the escalation of tariff war in April this year, Ind-Ra expects Indian MSMEs to turn more vulnerable, especially entities in the sectors where the impact of tariff war is negative.
The rating's agency's analysis suggests that as on March 31, 2024, 23 per cent of the MSMEs remained stressed compared to 11 per cent for mid-size corporations (MCs), which are better positioned than pre-COVID levels to manage business cycles.
Ind-Ra believes that any demand slowdown could impact MSMEs more than MCs, although a reduction in interest rates and an improvement in systemic liquidity could provide cushion.
There is notable polarity in the operating and financial metrics of MCs and MSMEs, with the former's operating performance and return on equity (RoE) starkly improving during FY15-FY24 and little-to-no improvement for MSMEs.
An increasing disparity in RoE profiles of MSMEs and MCs was observed and improvement in MSMEs' operating performance remains skewed, Ind-Ra said in a release.
MSMEs' capital expenditure remains subdued in India, while MCs are better placed to withstand financial shocks than MSMEs, Ind-Ra added.
On aggregate, 6 per cent of the 1,898 Indian MSMEs studied are in the high-risk category, holding the total debt outstanding of around ₹81 billion as of FY24, which comprises 16 per cent of the total debt of 1,898 MSMEs.
Only 5 per cent of MCs are in the high-risk category, holding the total debt outstanding of around ₹137 billion as of FY24, which comprises 11 per cent of the total debt of 1,055 MCs.
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