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Inflation Hitting Small Businesses In County: India SME Forum

On average, these MSMEs spend 58 per cent of their total expenditure on raw materials and intermediate goods, the industry body said

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The rise of India's wholesale price inflation triggered by the Ukraine war and a weak rupee are raising risks for small businesses to cope with the ongoing situation, said Vinod Kumar, President, India SME Forum. 

Kumar said that micro, small and medium enterprises (MSMEs) from food processing, textile, automobile, energy, heavy machinery, engineering and plastics sectors are struggling to manage their margins amid rising input prices such as steel, aluminium and copper, coal, semiconductors, petroleum products etc.  

Steel, coal and cement price increases may also prompt property developers to raise property prices, affecting demand in the real estate sector and having a multiplier effect on the economy, added Kumar. 

India's annual wholesale price-based inflation rose to a record 15.88 per cent in May, as compared to 13.11 per cent in May 2021, said the Ministry of Commerce and Industry.  

According to an internal estimate by India SME Forum, the operating costs of micro, small, and medium-sized businesses have increased by nearly 24 per cent due to a sharp rise in raw material prices. The cost of materials has risen 37 per cent in FY 2021-22 from the previous year for 120 manufacturing MSMEs. 

The share of material cost in the overall expenses of these MSMEs grew cumulatively from 58 per cent in FY 2020-21 to 69 per cent in FY 2021-22. Among these MSMEs, the cost of materials consumed has grown faster in FY 2021-22 from the previous year than the corresponding growth in annual sales thereby affecting margins, the survey mentioned. 

While talking about the steps that can protect MSMEs from rising prices, Kumar said, "To supply input materials to MSMEs at an affordable cost, raw material depots should be started near MSME clusters by National Small Industries Corporation, a government corporation catering to the procurement of Raw Material by MSMEs." 

The government has recently waived customs duty on the import of some raw materials, including coking coal and ferronickel, used by the steel industry, a move which lowered the cost for the domestic industry and reduced the prices. Some things on similar lines can be done with other critical raw material inputs for MSMEs to ensure availability in the local market at an affordable cost, he said. 

"Enhance the flow of low-cost bank credit (especially working capital loans) against GST invoices to MSMEs - Working capital is the lifeline of a business to carry out day-to-day operations. Managing working capital efficiently is a problem that plagues both small and large businesses," he said. 

It is important to prioritise the supply of raw material to MSME units, to prevent loss of jobs and disruption to exports and while the government has been quite proactive, more measures are desirable, he said. 

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