With the economy heading towards an impending recession, MSMEs in India are bracing themselves for a fight for survival.
While they had a tough time combating the losses incurred during demonetization and the pandemic, the issues of inflation and geopolitical developments are making MSMEs think about the acute shortage of capital they could face in the coming days.
Indian MSMEs struggle day and night to maintain a regular cashflow. They are highly dependent on peer-to-peer loans as well as banks. Since interest rates in the vulnerable sectors are now dependent on the repo rate, the impact of the RBI’s decision to increase this rate will heavily affect SMEs.
So, naturally, if there is a very sharp hike in the repo rate, these sectors will begin to hurt, and that will also impact consumption demand.
What is a recession?
According to the National Bureau of Economic Research (NBER), based in Cambridge, USA,A recession is a significant decline in economic activity across the economy that lasts for more than a few months and is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.During a recession, the economy struggles, people lose their jobs, businesses make fewer sales, and the nation’s economic output decreases. The point at which the economy officially enters a recession depends on numerous factors.
Why does a recession happen?
Falling out of control from uncontrolled inflation is one of the major causes of the recession. But a recession can start for multiple reasons. Let’s discuss the major ones:-
Uncontrolled Debt:
When a country takes on too much debt, the cost of servicing the debt might escalate to the point that it cannot meet the country’s fundamental necessities; this is when a recession begins.
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An unpredictable economic shock
An economic shock is an unexpected event that has a significant negative impact on the economy.
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Roaring inflation
In simple terms, inflation means an upward trend in prices over a period of time. Increases in interest rates are made by central banks to rein in inflation, but this strategy has the unintended consequence of dampening economic growth.
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Asset bubbles
When investors are motivated by emotions rather than logic, bad financial outcomes are inevitable. When the economy is doing well, investors sometimes get ahead of themselves.
Is India going through a recession?
India experienced one of the world’s deepest recessions when the first wave of the COVID-19 pandemic broke out and a nationwide lockdown was imposed to curb the spread of the disease. GDP fell by as much as 23.8% in Q1FY21. By the time India could recover from the damage caused by the coronavirus outbreak, the Ukraine-Russia war kicked off. This, along with other reasons, created inflation in India. The Ministry of Statistics and Programme Implementation reported that annual retail inflation in India rose to 7.79 percent in April. Moreover, experts are expecting inflation in India to remain above the RBI’s upper tolerance level of 6 percent until December 2022.What is a technical recession?
There is a risk that if the export cycle globally slows and domestic policy is tightened, then over the next 12-18 months, India could see a slowdown. It’s not a recession, but there is a greater chance of a slowdown in growth over the next 12-18 months. Experts, on the other hand, say that inflation, along with things like stock market crashes and high-interest rates, is a major cause of recession. Although India is yet to reach the stage of recession (at least that’s what the reports say), in the coming days, the Indian economy may experience a slowdown as a result of recent geopolitical events and the central bank’s policy rollback. However, if India’s GDP drops for two consecutive quarters, the country will be considered to be in a “technical recession.”What does the impending recession mean for Indian MSMEs?
Indian MSMEs struggle day and night to maintain a regular cashflow. They are highly dependent on peer-to-peer loans as well as banks. Since interest rates in the vulnerable sectors are now dependent on the repo rate, the impact of the RBI’s decision to increase this rate will heavily affect SMEs.
So, naturally, if there is a very sharp hike in the repo rate, these sectors will begin to hurt, and that will also impact consumption demand.
- According to reports, India’s economic growth will slow down as a result of the US experiencing a “prolonged mild recession.” There are already problems with growth, and India is the only Asian country with inflation significantly higher than its target.
- The decline of Indian currency will give a hard time to budding businesses in the country. Weaker currencies tend to increase the cost of imported goods while encouraging exports by making goods sold abroad more affordable to buyers from other countries.
- The United States accounts for over 60% of India’s IT-ITES exports and accounts for around 18% of India’s merchandise export market. The global growth slowdown is also likely to have an adverse effect on India’s export and investment prospects.
- During a recession, business owners see a drop in revenue and may be forced to declare bankruptcy. The government tries to help businesses by providing aid during recessions, such as the MSME Relief Package provided during the coronavirus crisis, but it can be difficult to keep everyone afloat.
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Conclusion
Experts agree that a reduction in fuel duties is required in order to prevent future incidents like this one, as these duties have a direct and indirect effect on electricity rates, transportation costs, and so on. For speedy recovery of the rural economy, it is essential to invest in agriculture, horticulture, and the food processing industries. However, with careful preparation, a downturn can be halted in its tracks. Moreover, to ease the financial strain from the impending recession on MSMEs, the government and the central bank can consider introducing certain relief packages and flexible loan repayment options, respectively.What’s your Reaction?
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