Restrictive Global Monetary Policy Threatens SMEs' Debt Repayment

A recent report by UGro Capital has revealed that restrictive monetary policy settings globally will likely have larger consequences for small businesses in servicing their debt obligations. Monetary policy remained restrictive in over 85 per cent of the world’s economies in 2023.

The report in collaboration with Dun & Bradstreet (D&B) stated that monetary easing has not proceeded as quickly as expected in developed economies. Central Banks across developing countries have started easing to support growth.

In 2024, given that inflation is likely to fall more slowly and less linearly, this will result in more restrictive policy settings than initially anticipated at the beginning of the year. “Higher interest rates and lower medium-term growth prospects further complicate the debt dynamics with consequences for small business to service their debt obligations,” the report added.

Trade Interventions, Geopolitical Risks And Supply Chain Optimism
In recent years, geopolitical risks from elections, polarisation and conflicts within and between states have increased, challenging efforts to maintain business resilience. The MSME Sampark, a bi-annual report stated that the rise in trade interventions and geopolitical risks have dented the supply chain optimism of businesses.

The Geopolitical Risk Index, developed by Dario Caldara and Matteo Iacoviello, surged after Russia invaded Ukraine in March 2022 and reached its highest point since April 2003, when the US invaded Iraq. It spiked again in October due to the Israel-Hamas conflict and remains elevated. Additionally, new trade restrictions more than tripled in 2023 compared to 2019, and financial sanctions have also increased, disrupting trade and the global supply chain.

Notably, disruptions at two critical shipping routes i.e. Suez Canal and Panama Canal accounting for 15 per cent and 5 per cent of global maritime trade volume have led to higher shipping and freight charges and longer delivery times impacting both large and especially small businesses that run on thin margins.

Dun & Bradstreet’s Global Business Supply Chain Continuity Index which tracks the optimism of large, medium and small businesses across 32 countries reveals that after the fall in optimism in Q4 2023 and Q1 2024, supply chain optimism has increased since Q2 2024. Businesses globally now anticipate that supply chain risks will remain at current elevated levels and have adapted to this new environment.

The increase in overall optimism for the supply chain is largely driven by small businesses’ whose optimism rose sharply (+21.8 per cent) in Q3 2024, supported by their ability to source locally. On the other hand, optimism for large and medium-sized businesses is still showing signs of concern and dropped by 2.4 per cent and 13.4 per cent respectively as they are more exposed to the vagaries of higher shipping charges, congestion across routes, and lengthier routes.

Despite the disruptions in the global supply chain, the optimism of Indian businesses for their supply chain continuity recovered since the start of 2024 but fell in Q3, according to a survey conducted by Dun & Bradstreet. The continuation of the supply chain disruptions might have taken a toll on businesses that are more exposed to the global supply chain. Nearly six months of continuous attacks on vessels in the Red Sea have led to increased shipping charges, route congestion, and longer routes. 

The Drewry WCI composite index stood at USD 5,868 per 40ft container for the week ending 4 July 2024, marking a 298 per cent increase compared to the same week last year. Although this is 43 per cent below the peak of USD 10,377 during the pandemic in September 2021, it is still 313 per cent higher than the pre-pandemic average of USD 1,420 in 2019. The SCI faltered in Q3 2024, driven by large and medium players whose optimism deteriorated significantly reflecting the challenges of an interconnected global supply chain.

However, smaller businesses appear to be more optimistic benefiting from their ability to source locally and as they are expected to reduce their supplier concentration risk and lower supplier costs," according to the report.

Shifts In Consumption Patterns And MSMEs
The government’s survey on monthly per capita consumption expenditure (MPCE) shows that MPCE for rural households increased 2.7-fold in FY23 from FY12, while that of urban households increased 2.5-fold over the same period. The results also show a narrowing gap between rural and urban consumption. In FY23, the average urban household spent 71.2 per cent more than its rural counterpart, compared to 84 per cent more in FY12 and 91 per cent more in FY05.

The share of expenditure on conveyance, durable goods, beverages and processed food saw the largest increase from FY12 to FY23 for both rural and urban households. Additionally, the expenditure on durable goods has risen noticeably, reflecting an increase in the average consumer's purchasing power. According to a study, by 2030, it is estimated that India will witness a 4x growth in consumer spending. 

The rapid growth in digitalisation is also expected to fuel consumer spending in one of the youngest nations in the world. “Shifts in consumption patterns would require MSMEs to adapt through innovation, technology, and strategic changes to meet evolving consumer demand,” the report stated. 

Avinash Gupta, Managing Director (MD) and Chief Executive Officer (CEO)- India, Dun & Bradstreet, said, “As India's contribution to global GDP is projected to double by 2029 compared to 2019, the growth prospects and accompanying shifts in consumption patterns will require MSMEs to adapt through innovation, technology adoption, and strategic changes. To grow and innovate MSMEs would need access to credit and technology.”

Notably, MSMEs contribute around 30 per cent to India's gross domestic product (GDP) but their share in non-food credit remains relatively low at around 6.0 per cent in FY24. “Government initiatives aimed at digitalisation and incorporating MSMEs' digital footprints into credit decisions are expected to further enhance their access to credit, technology, and markets,” Gupta mentioned.