MSME Day: Gujarat's MSMEs reel under loss of demand

From Surat's diamond industry to Ahmedabad's dyes and pigments businesses, exports have been impacted by economic slowdowns and geopolitical factors

By Naandika Tripathi Forbes India Staff

Published: Jun 27, 2023 03:45:47 PM IST

Updated: Jun 27, 2023 05:15:34 PM IST

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As the world celebrates MSME Day on June 27, all is not well with the micro, small and medium enterprises (MSMEs) in Gujarat. Especially the diamond industry in Surat. A major contributor to India’s gem and jewellery exports, the diamond industry employs around 8 lakh people and accounts for exports of about Rs 3 lakh crore. Demand in the industry has been significantly impacted due to reasons such as global economic slowdowns, mainly in China, which is one of India’s biggest diamond export markets, and also the Russia-Ukraine war, which has stopped the import of rough diamonds from Russia. Recently, the G7 group of nation’s decision to put fresh sanctions on Russian diamonds has put the jobs of diamond workers in Surat at stake.

In the past three months, eight diamond workers in Surat have died by suicide, and about 15,000 of them have been laid off, while the industry's losses have increased from 1 percent to 15-20 percent annually in the last five years, The Print reported.

A recent analysis by global analytics company Crisil said that MSMEs, accounting for approximately 40 percent of India’s exports, will face headwinds from the imminent economic slowdown in advanced countries, particularly in the US and the Eurozone; these two geographies account for a third of India’s overall exports.

Nikit Agarwal, director and CEO of Surat-based Amantran Jewels, agrees. It has seen an almost 40 percent decline in exports in the last three years. The 25-year-old company exports its diamond jewellery to the US and Europe. “Currently, we’re focusing on the domestic market, which is doing fairly well. We have also forayed into lab-grown diamonds because their demand is gradually catching up in the international market. The government is also supporting it more,” says Agarwal.

Between April 2022 and March 2023, the overall gross exports of cut and polished diamonds stood at Rs 1.76 lakh crore, down 2.97 percent compared to the same period in the previous year, which was Rs 1.82 lakh crore.

Surat accounts for 90 percent of India’s diamond exports. Diamonds constitute more than half of India’s gems and jewellery exports, and a substantial decline in demand from the US, the largest export market, is having a significant impact, according to the Crisil report. That, in turn, is having a bearing on receivable days, leading to an increase in working capital days from 140 before the Covid-19 pandemic to more than 200 this fiscal year.

Sectors such as dyes and pigments are also reeling under pressure. The Ahmedabad cluster has a large number of MSMEs working with dyes and pigments, pesticides, and pharmaceuticals. As per the Crisil study, the rise in working capital days for the dyes and pigments sector is because of three factors: Inventory pile-up following dumping by Chinese producers, the recent earthquake in Turkey, and a slowdown in the US. These three countries account for 20 to 25 percent of total exports of dyes and pigments, pesticides, and pharmaceuticals.

Shailesh Patel, founder of Ahmedabad-based Parshwanath Dyestuff Industries, agrees. The company, which has been around for 27 years, has never been this badly impacted. The situation is so bad that it has been running at a loss for the last two years, and the situation doesn’t seem to be getting any better. As the company struggles to survive, it has laid off 70 of its workers. The factory, which has a 250-metric tonne production capacity, has run at only 30 percent capacity for the past couple of years.

“We export dyes and pigments mostly to China, Bangladesh, Pakistan, Turkey, and Indonesia. China was our biggest market. But not anymore. Its anti-dumping duty has added to our problems. Payments are pending from many other markets. There are currency problems with other countries. Earlier, we used to make a profit of Rs 15 lakh per month, and now there’s no profit. We’re even struggling to pay the existing 30 workers. The domestic market is also down,” says Patel, who also runs construction and food colour businesses on the side.

Overall demand for dyes and pigments from India has dropped due to various reasons. Textile mills in several South Asian and African countries have not been doing well since imported fabric from China is available at low costs. Turkey, which is a major market for India’s dye business, is not attractive anymore due to the devaluation of its currency.

“Turkey was a major export hub for Indian dyestuffs, because of inflation, devaluation of the currency, and general macro-economic conditions, a lot of textile companies are shutting down or on the verge of closure, which has lowered demand. They largely now tend to be a re-export hub because China is now pushing finished fabrics, further reducing for the demand for dyes,” explains Aljo Joseph, founder and chief business officer of BharatNXT, which is a business payments platform for SMEs.

Joseph connected with some of his customers in the dyes and pigments business and found out that local manufacturers are now holding large inventories, and additionally, most markets now demand longer credit periods, thus increasing the need for working capital financing.

An analysis by Crisil shows a fifth of the MSME sector by value is expected to witness an increase in working capital requirements this fiscal year, compared with pre-pandemic (FY20) levels. These MSMEs are in sectors already grappling with high working capital requirements. The debt requirement for the MSME sector is estimated at over Rs 100 lakh crore.

Also Read: 6 ways India's MSME sector can be made stronger

In this year's Union Budget, the government allocated about Rs 22,140 crore for the MSME sector, which is a 42 percent increase from the previous year. Access to formal credit is a fundamental priority, raised even by Cabinet ministers and officials. The government’s focus on MSME formal credit in India is evident in the Union Budget, explains Pushan Sharma, director, research, Crisil Market Intelligence and Analytics. “Allocations to the Ministry of MSME grew 8x from FY16 to FY24, and almost two-third of the MSME Budget allocations are directed towards credit support schemes in FY24. Still, the credit gap remains high; it was estimated at Rs 20–25 lakh crore as per the UK Sinha Expert Committee on MSME in India.”

MSMEs contribute 33 percent of India's GDP, 50 percent of its exports, and 19 percent of its employment. A significant number of MSMEs currently operate outside the formal financial system and resort to costly and unreliable sources of financing. Efforts should be made to accelerate the formalisation of MSMEs. As per the Standing Committee Report on Finance chaired by Jayant Sinha, if working capital is provided to MSMEs on the basis of GST invoices, it would spur formalisation, explains Sharma of Crisil.

He further suggests that embracing an account aggregator framework would enhance access to credit for MSMEs by enabling secure sharing of digital financial data, thereby improving risk assessment, preventing fraud, and reducing non-performing assets.

“Increasingly, transitioning to cash-flow lending, which relies on information-based systems rather than physical assets as collateral, would allow lenders to assess loan requirements based on the cash flow of the MSMEs. Providing targeted credit guarantees as stressed sectors require higher support. Government guarantee programmes can be provided for specific industries and specific geographical areas," he concludes.