Small businesses in India could face impact of Donald Trump’s tariffs, in more ways than one

US President Donald Trump may have kept in abeyance for 90 days his reciprocal tariff rate for India, but the domino effect of that action could have even worse, indirect, consequences for India’s medium, small and micro enterprises (MSME) sector. That, just about when they were recovering from the whammy of Covid-19 aftermath.

 

With the worsening of operating conditions, once the tariff war escalates, MSMEs in India could get more vulnerable, especially those operating in sectors where the impact of the tariff war is negative, says India Ratings & Research (Ind-Ra) in a new study unveiled on Tuesday.

 

“Capex intensity is usually low as MSMEs grapple more with working capital issues and need adequate finance at competitive rates to manage those. Additionally, MSMEs 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 and customers”, says Neermoy Shah, associate director (emerging corporates), Ind-Ra.

 

In fact, the agency’s analysis suggests that 23% of MSMEs remained stressed already, with coming tariff wars possibly making it worse. While small businesses may not have that much exposure to export trade, the bigger impact, according to Ind-Ra officials, would be if countries like China, whose goods get shut out of markets like the US due to high tariffs, in turn, flood India’s domestic markets, leading to a drop in prices and by turn, drop in margins.

 

“Companies at the lower end of the spectrum who compete with lower economy countries like China could be impacted as margins could get squeezed,” said Rahul Kamdar, senior analyst with Ind-Ra. “While tariffs could open up opportunities for sectors like textiles and chemicals, if you take commodities (that go into their making) they might have to face import dump from China. The lower end of the supply chain might be impacted.”

 

“Any demand slowdown could impact MSMEs more than MCs, although a reduction in interest rates and an improvement in systemic liquidity could provide cushion,” according to a note issued by the rating agency.

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