Reciprocal Tariffs Will Exacerbate Stress For MSMEs: Ind-Ra

India Ratings and Research (Ind-Ra) on Tuesday said reciprocal tariffs will exacerbate stress for medium, small and micro enterprises (MSMEs) but mid-sized corporates have a greater cushion against unanticipated financial shocks. With the worsening of operating conditions owing to the escalation of tariff war in April 2025, Ind-Ra expects MSMEs to turn more vulnerable, especially in the sectors where the impact of tariff war is negative. As of March 31, 2024, the agency's analysis suggested that 23 per cent of MSMEs remained stressed compared to 11 per cent for MCs (mid-corporates).

MCs are better positioned than pre-COVID levels to manage business cycles. A study of 1,898 listed and unlisted MSMEs and 1,055 MCs highlights that MCs have a greater cushion against unanticipated financial shocks than MSMEs, given their healthy financial metrics. "Capex intensity is usually low as MSMEs grapple more with working capital issues than MCs, and need adequate finance at competitive rates to manage those. Additionally, MSMEs - unlike MCs - are largely promoter-driven entities and lack a capable second line of management who have the knowledge and skill sets to bargain with lenders/suppliers/customers," Neermoy Shah, Associate Director - Emerging Corporates at Ind-Ra, said.

Ind-Ra opined that the reciprocal tariffs will exacerbate stress for MSMEs, with revenue below Rs 250 crore and investment in plant and machinery below Rs 5 crore as of March 31, 2024, with moderate to high intensity. The credit profile of these entities has reverted to pre-COVID level, but the improvement has lagged that of MCs with revenues ranging between Rs 250 crore and Rs 1,000 crore as of March 31, 2024. 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 a cushion.

MSMEs Capex has modestly picked up post-COVID but remains lower than historical levels. Lastly, the lack of improvement in the coverage ratios of MSMEs and the percentage of loss-making MSMEs further highlights the vulnerability of MSMEs to exogenous shocks. Externally, the sluggish consumption trends and global slowdown in the face of tariff war 2.0 may put a strain on MSMEs operating and credit metrics, Ind-Ra said.

On April 2, US President Donald Trump announced that it will impose reciprocal tariffs on countries with which it has a tariff imbalance. On April 9, the US administration authorised a 90-day pause on the implementation of most reciprocal tariffs, reverting to a universal rate of 10 per cent on almost all targeted countries, while raising tariffs on most goods from China to 145 per cent. Later on April 16, the US further hiked tariffs on exports from China to 245 per cent.

(PTI)