Prospects of a global recession looms. Small businesses prepare for trial by fire – The Economic Times

Clipped from: https://economictimes.indiatimes.com/small-biz/sme-sector/prospects-of-a-global-recession-looms-small-businesses-prepare-for-trial-by-fire/articleshow/92817438.cms

SynopsisTalk around the dreaded R-word (recession) is getting louder as inflation, geopolitical tensions and supply chain disruptions hammer the global economy. What does this imply for the scores of small businesses?

The global economic outlook paints a grim scenario. The continued tensions amid the Russia-Ukraine war has meant a slower recovery worldwide. Supply chain disruptions and Covid lockdowns in China are adding to the problem. The International Monetary Fund (IMF) had in its latest World Economic Outlook projected global growth to slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023.

Such indicators have led to mounting fears of a recession, with inflationary pressures and geopolitical tensions showing no signs of a let up. In May, IMF’s Managing Director Kristalina Georgieva talked about how the world is experiencing a crisis on top of a crisis. “First the pandemic, now the war in Ukraine. And that is a major setback for the recovery of the world economy,” Georgieva said at the World Economic Forum (WEF)’s annual meet in Davos. The IMF had to downgrade its 2022 growth prospects for 143 countries. “This brings global growth from 4.9 (%), where we projected it in October last year to 3.6 (%) where it is today. And on top of it, we see a very significant acceleration of inflation in many, many countries,” she said. The global economic outlook dimmed quickly. “In a short period of time…the horizon has darkened.” Georgieva said she did not expect a recession for the world’s major economies but added it cannot be ruled out either.

The climate has become more adverse now. On June 20, economists at Nomura Holdings said the US would see a mild recession in 2022 and financial conditions would tighten further. This would lead to a slowdown in India as well. “When combined with elevated levels of inflation that is eroding consumption growth and the growth sacrifice from tighter financial conditions, suggests a broader growth slowdown for India over the medium term,” they added.

Latest-World-Economic-Outlo

The whiff of recession does not bode well for the scores of small businesses in India. If the markets abroad now see further economic slowdown, these companies in India might not be able to take the additional heat. The MSME sector contributes 48% to India’s exports and the government wants to increase this number. A recessionary trend will dampen export growth also. MSMEs have already been hard pressed in the face of the pandemic, followed by supply chain disruptions, high input costs and soaring freight rates. Will they be able to withstand another economic bodyblow — one that puts more pressure on depressed consumption and increased prices?

What it means for MSMEs
V Padmanand, Partner, Grant Thornton Bharat, says aspects such as the war and the supply chain lags are all factors that point to a possible recession. Moreover, he says, the uncertainty and risks posed during the pandemic has brought in cautious spending. This means there is less money than usual in the market. “Once people are careful of spending, the economy will go into recession. It is not just the virus but also the conflicts around Russia (with Ukraine) and China (with Taiwan) will also contribute to it,” he says.

Larger MSMEs are likely to be at more of a disadvantage than smaller MSMEs in such a situation. “MSMEs that have a turnover of below Rs 10 crore do not have very high fixed costs. They largely operate on variable costs. So even if there is a reduction in output and volumes, it won’t be a major burden for them when compared with peers in other countries where labour laws are strict and businesses have to pay despite such conditions. Larger MSMEs, on the other hand, which have higher fixed costs, will suffer,” he says.

However, the MSMEs ET Digital spoke to said they have already started feeling the impact of recessionary trends.

Mahesh Choudhary, Founder and Chairman of Saraswati Global, a manufacturer and exporter of handmade rugs, says they have started to see a slowdown of 15-20% in sales in the last couple of months. “Our operations here and our buyers in the US are experiencing the effect to some extent. The increase in container freight rates and other variables have also affected us. Our business was recovering after Covid-19. But this recessionary trend will harm us. It will have a double impact on us,” he says ruefully.

Sensing how things could further deteriorate, Choudhary has already initiated some steps that can augur well for the firm in the long run. The main focus is on controlling costs and tightening budgets. “The first step has been cutting costs. There was a hike in salaries during the pandemic and newer people in the organisation were demanding a 25-30% increase in remuneration. But with the possibility of a recession in store, we are trying to control the salary expense. We will not go above our budget, even if we have to hire fewer people,” he says.

Developing-economies

Many companies are turning their focus on to the less risky aspects of business so that they are better prepared to deal with a recession.

Choudhary, for instance, says they are only manufacturing products that are least prone to risks, unlike earlier. “In the carpet business, it is usually the hand-knotted carpets that are risk-free because they are seen as one of a kind. They get sold because they are of really high quality and very little quantity of these rugs are made. So, people buy them regularly. On the other hand, it is harder to sell the newer products from the catalogue once they get stocked,” he explains.

Combating the challenges

Aditi Nayar, Chief Economist of

ICRA

, expects the near-term outlook for economic activity to remain uneven. “ICRA expects Indian GDP to expand by 7.2% in FY23. External demand is expected to be cautious following the geopolitical tensions, which could weigh on the performance of the manufacturing sector. The surge in domestic inflation is expected to strain household budgets and compress discretionary consumption, particularly in the low-to-middle income segments,” she says.

Global MSME counterparts have also started taking precautionary measures that include optimising cash flows and prioritising aspects such as marketing, which may not have been done as actively as before. Indian SMEs across sectors are also tweaking their strategies to be recession-ready.

Saurabh Salecha, Partner at

Neelkanth

Minechem, a manufacturer and seller of pharmaceutical and cosmetic raw materials, says a global recession will be highly unfavourable for the sector. “After Covid-19, our costs have increased, including production, raw material and labour costs. The market has also become competitive. A global recession would impact the sector as our costs are already high, resulting in the products becoming expensive too. In my opinion, the market will not buy these expensive products if spending drops even further,” he says.

The firm is removing unnecessary steps in their business operations and trying to lower expenditure. While they are still focusing on marketing and allied activities, the managers are keeping a tab on the cost.

Companies such as Mumbai-based Goldmedal Electricals have been analysing data at regular intervals to understand patterns better. They are betting this information would be handy in case the economic situation becomes tighter. “We are keeping a close eye on the ground situation, ensuring supply chain visibility and taking feedback from our customers to be more well equipped,” says Bishan Jain, Director, Goldmedal Electricals.

SGPL-(1)

Workers making handmade rugs at Saraswati Global.

Wage-price spiral
What is also causing worry for small businesses is that inflation will inevitably give way to a wage-price spiral, a term used to describe the cause and effect equation between rising wages and rising prices. A wage increase leads to a rise in general business expenses, which are essentially passed on to the consumer in the form of higher prices. It ends up being a constant loop of consistent price increases.

Sanjay Bhatia, Co-Founder & CEO, Freightwalla, says the bigger concern in the long run is the “wage bill”.

“The moment energy and food costs go up, a wage-price spiral would set in. The fear of this spiral is increasing in the USA. When the inflation numbers were first high, they said it was a temporary thing. This has not been the case and now the fears are increasing,” he says.

The spiral is based on expectations of consistently high inflation. Bhatia expects the short-term fear to be high and the long-term fear to revolve more around the wage-price spiral. In India, the Wholesale Price Index (WPI)-based inflation was higher than estimated. “Very quickly, this will start affecting daily expenses. So, everyone will need to start increasing their salaries to maintain the standard of living. The wage-price spiral is an area of long-term concern,” he says.

In the case of a recession, the CEO of the freight forwarding company says, the country might be able to absorb the blow better because of the sheer scale of the market. But this is also a disadvantage as policy implementation takes time. “Vietnam, being much smaller, is able to take advantage of the opportunity at a pace that India would like to do but is not realistically possible,” he says.

MSMEs expect the situation to be bad for 6-18 months. Industry experts claim the main issues that are causing economic distress — the Russia-Ukraine conflict, business disruption in China and the pandemic shocks — are relatively temporary. Economies will eventually find a way to internalise these and stabilise.

Though the near-term outlook may appear uncertain for India’s MSMEs because of back-to-back economic shocks, it is not expected to dent their recovery in the longer term.

Grant Thornton Bharat’s Padmanand says the country will be able to withstand the shocks better. “India will not be affected as hard due to the youth population it has and the strong local demand. The MSME sector in the country will first survive and then thrive.”

(With inputs from Shaan Singh Chhabra. Edited by Ram Mohan and illustrations by Mohammad Arshad)
(Originally published on Jul 12, 2022, 10:01 AM IST)

Share the joy of reading! Gift this story to your friends & peers with a personalized message. Gift Now

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s