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How Is the Economy Really Doing? India’s Small Businesses Offer a Clue

Economic Growth Slows to a Seven-Quarter Low

India’s GDP growth for Q2 FY25 dropped to 5.4%, the slowest in seven quarters, reflecting a significant decline from 8.1% in the same period last year and 6.7% in the previous quarter. While this surprised many, small businesses have long signaled the economic slowdown due to rising costs, falling demand, and limited access to affordable credit.

MSMEs: Backbone of the Economy Facing Decline

Micro, Small, and Medium Enterprises (MSMEs) contribute 40% of manufacturing output, generate 22 crore jobs, and account for 40% of exports. Initially buoyed by post-COVID demand, the sector now faces steep challenges. Since Q1 FY23, economic activity has slowed, and consumer demand has stagnated. Manufacturing MSMEs, in particular, have struggled, with most operating at less than 50% capacity since October 2022.

Credit Crunch: A Persistent Challenge

Access to affordable credit remains a critical issue. India’s MSMEs face a credit gap of $530 billion, with formal lenders fulfilling only $289 billion of their $819 billion debt demand. High collateral requirements and uncompetitive interest rates further restrict institutional financing. Many businesses turn to NBFCs, where higher borrowing costs erode margins and extend delivery cycles.

Impact on Manufacturing and Exports

Manufacturing growth in Q2 FY25 was a sluggish 2.2%. Rising costs, weather events, and geopolitical tensions have compounded inflationary pressures. Export-focused MSMEs face additional hurdles, as the lack of competitive interest rates hampers their ability to meet global demand. Initiatives like the Interest Equalisation Scheme (IES) have struggled to gain traction due to insufficient financial support.

The Need for Immediate Action

Experts emphasize the urgency of reduced interest rates, credit guarantees, and subsidies to empower domestic players. Without these measures, MSMEs will continue to face difficulties in meeting supply demands and tapping into any potential future growth opportunities.

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