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GDP reduction creates 'existential risk' for MSMEs

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A 5% fall in the gross domestic product ( GDP) during 2020-21 may lead to a 15% decrease in Indian corporate revenues and present an "existential risk" to small businesses, a report stated on Monday.

Similarly, the Reserve Bank of India ( RBI) and the finance ministry's policy interventions offer little promise because they can't resurrect demand, which is essential for small businesses, the study said.

The MSME sector would see a sharper drop in sales of up to 21%. Although operating profitability would reduce to 4-5 percent the research wing of domestic rating agency Crisil stated. Because of the effect of the coronavirus outbreak, which has spurred to nearly three months of lockdown throughout the country with little stages to open up recently, the agency expects a 5 percent contraction in the economy. The Government and the RBI already have confirmed actions such as collateral-free loans to the segment of up to Rs 3 lakh crore since the crisis began.

GDP reduction creates 'existential risk' for MSMEs
 

The interest service coverage ratio could slide to 1-1.5 times from 2.4 times between both the financial years 2016-17 and 2019-20, however after considering in the interest payment moratorium unveiled by the RBI, adding that the ratio would have gone below one without the moratorium.

The worst-hit would be the micro-enterprise category, which accounts for 32 percent of the total MSME debt and faces a significant burden in terms of wealth creation, running profit margins and extend of working capital.

"Since fiscal stimulus is minimal and only for poor families, the new facilitations do not have the leverage to ramp up demand in the near term," its chief operating officer Amish Mehta added.

"It is crucial that the supply curve is pulled sharply northward, particularly in budgetary goods and services," he said.

He added: " three-pronged tactic is now crucial, which should involve improving the job security for formal and informal workers in order to enhance consumption, accelerating the development of the Aatmanirbhar scheme to ensure continued liquidity flow to MSMEs, and lenders heading beyond traditional credit mechanisms because they have to play a key role in rehabilitation.

GDP reduction creates 'existential risk' for MSMEs
 

From the sectoral viewpoint, it said that budgetary customers, construction and export-linked entities would bear the consequences, whereas small real estate contractors have been dramatically impacted by EPC projects (engineering, procurement, construction) and ceramics and textile manufacturers, rendering their credit ratings the most fragile.

MSMEs' revenue growth in the real estate EPC sector could nearly halve, with demand falling, even as increasing prices, supply chain shortages and labour issues impose extreme marginal strain, he said.

Lower use and limited uptake of price hike BS-VI could weaken margins of auto-component MSMEs this fiscal year due to lower prices of raw materials, report says.

The larger companies are not projected to be as much impacted by the uncertainties, so the overall revenue growth would only drop by 15 percent, although the net revenue margins would slip by a fourth, it stated.

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