SMEs Expect Costs To Continue Rising Over The Next Months: Survey

SPJIMR study highlights the disproportionate risk of inflation on small and medium family enterprises

A study released by Bhavan’s SP Jain Institute of Management and Research (SPJIMR) has found that the impact of inflation on small and medium family enterprises is far greater than is suggested by the current retail or wholesale inflation rates estimated by the government. The study, undertaken by SPJIMR’s Centre for Family Business & Entrepreneurship (CFBE), found that a vast majority of small and medium family enterprises have experienced significant operating cost increases and are responding with price increases - a strategy that may not be sustainable. The study also recommends policy prescriptions to mitigate the disproportionate risk being borne by the small and medium enterprises (SMEs) sector of the economy.

The average increase in operating costs reported by small and medium family enterprises is 19.5 per cent which is far above the current retail and wholesale inflation rates of 6.07 per cent and 13.11 per cent respectively estimated by the government. Manufacturing enterprises seem to be bearing the brunt of the cost increases, reporting an average cost increase of 24 per cent, whereas service enterprises reported an average cost increase of 14.4 per cent. This would impose a strain on an economic strategy that relies on a manufacturing-led industrial recovery. Moreover, businesses located in North and Western India seem to have had cost increases more than those in the rest of India, the study found. 

The small and medium enterprises (SMEs) surveyed for the study attribute their rising operating costs to increases in the prices of raw materials, fuel, and labour. While raw material price increases are affecting both the manufacturing and service sectors, the rise in fuel and labour costs is having a greater impact on the SME service sector than on the SME manufacturing sector. 

83 per cent of the respondents have responded to such cost increases by increasing their prices. Enterprises have also improved their receivable collections and cash flow cycles through renegotiating contracts. They have, however, not pursued grammage reductions or quality reductions as responses to rising costs. The study also found that the SMEs expect costs to continue rising over the next three to twelve months, with a majority of the enterprises planning to increase prices in the next three months. 

The study, undertaken to highlight the inflationary risks to Indian small and medium family enterprises, examined factors contributing to inflation, responses to inflation and expectations regarding future inflation The study was conducted from March 18-25, 2022, and involved 170 respondents family enterprises located across 65 Indian cities, from the micro, small and medium enterprises. The full report can be accessed here.

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