The newly announced US Tariffs have made the industry at large concerned across the globe. Yet, the disruptive nature of the current global market presents a unique opportunity for Indian MSMEs. While being privy to the fact that major consumer brands are delaying their product launch in the States due to the unprecedented number of proposed tariffs being levied, the ripple effect is clearly visible. Furthermore, given the dependency on products being made in China, are there some factors left for Indian companies to be concerned about? How can Indian MSMEs tackle such an uncertain market to survive? We would decipher, analyse and attempt to answer these burning questions vide this article.
How Can MSMEs Survive These Turbulent Times?
For the mid-tier companies that survive by supplying various components and services to bigger corporations, this is a crucial period. We all know MSMEs always run into payment delays in India. However, they need to be more careful due to the uncertain nature of the US Tariffs and exports in general. On the other hand, our MSMEs are also worried about a fall in demand in the States if the designated US import duties are followed.
Furthermore, unlike in other markets, export market of India does not have the provision of insurance. Moreover, 98%-99% of export trades in India depend on the LC or Letter of Credit. Thus, many industry experts are suggesting that they should depend on LCs from banks to save them from any unpredictable outcomes. They also need to be careful while importing material from one place and should diversify their supply chain to ensure sustainable MSME growth.
Another thing the MSMEs need to pay attention to is having a better contract with their buyers, which covers all the potential situations. Under such a problematic market where trends are currently unpredictable, they need to have a contract that mitigates all of these issues. After all, it is better to be careful today than to be sorry tomorrow. MSMEs must also ensure that they have transit cover in case something happens to their exports, as this can directly affect export market of India and their ability to expand globally.
How are the Investor and IPO Market Looking After Tariffs?
The investors in India are having a really tough time in the market, as well as IPO filings in general. Investors and promoters are hesitant and holding back, which is highly affecting the valuation process. The uneven situation of our Indian currency with its dollar counterpart for months has forced investors to pull money from the Indian market. On the other hand, the stringent norms and governance by SEBI, the lack of FII participation and the lack of private players in the infrastructure building have led to sluggish IPO filings.
According to Mohit Gulati, the CIO and managing partner of ITI Growth Opportunities Fund, the US Tariffs have been affecting the US, India and other countries that are engaged in international trade. This has led IPOs to pause their activities and wait for the market to stabilise. However, in India, the first quarter saw positive growth in valuation, where many IPOs entered the market at a premium valuation. The average gain was up to 30% for the investors.
But last February, the market saw a significant decline in valuation. 3 out of 4 companies saw a lower listed issue price. However, even now, the market is still holding up, which can be seen by the average listing gains of 17.53%. Thus, currently the market may feel uncertain, IPOs may get lower validation, yet industry experts are still hoping for a stable market in the near future once the global situation stabilises and MSME growth recovers.
How Can Indian Companies Find Opportunities in a Disruptive Market?
A few weeks ago, Trump issued reciprocal tariffs on many countries in order to encourage local manufacturing. India was also hit with a 26% tariff, which immediately caused chaos and confusion in the industry. However, currently the US has paused the high tariff and limited it to 10% for 90 days. This has given the market a chance to re-strategize its position in the global trade.
As the US Tariffs loom large on the industry, experts believe the effects will be seen in the long term rather than immediately, but that could be positive depending on the actions taken by the companies. Currently, India does not depend heavily on the US for exports. As we export goods worth 80 billion dollars, which accounts for only 2% of our total GDP, Export market of India is relatively insulated but still sensitive to trade policy shifts.
However, the impact can be felt in four major sectors that trade with the US. The gems and jewellery industry is highly popular in the US. Moreover, many Indian MSMEs depend on the industry for supplying and manufacturing. The concern comes not in the form of tariffs but in a potential recession in the US that can lower the demand for such goods.
Textile is another thing that will be affected. As of now, Bangladesh has dominated the textile trade for years. However, due to the political environment in the country, many Indian entities are shifting their operations out of the country to India. Though our current exports are not as high as those of China or South-East Asian countries, if the higher tariffs are any indication, they will see a sharp decline in demand for their goods — leaving a wide window for Indian textile companies to fill that gap. Thus, they can turn the situation into an opportunity and capture a market previously dominated by other countries, fostering MSME growth through Indian-made textile goods.
As of now, the pharmaceutical companies are excluded from the US Tariffs, as all pharma MNCs depend on Indian and Chinese manufacturing.
What about the Industries that are Impacted? Are there Opportunities?
The electronics industry is likely to be affected by the US Tariffs. This new approach by the US shows its push for more domestic manufacturing (however, the scrapped CHIPS Act under the new government creates a contradiction). But for Indian MSMEs and many mid-scale enterprises, there is an opportunity to become suppliers for critical components.
Currently, China is sitting with a 145% tax (however, recently, Trump has said the tariff will be substantially reduced). Indian OEMs can take this opportunity, but the problem arises from the scalability issue of the Indian companies. Many foreign companies are indeed moving their factories out of China to our country. Like TATA is manufacturing Apple devices.
However, these factories are doing more assembly work than creating a product from scratch. We have no domestic brand that has a footing in the US market. We are only manufacturing or assembling products for foreign brands. Furthermore, our private entities are not playing any major role in scaling our manufacturing capabilities. They are solely dependent on government initiatives or subsidies.
Furthermore, our factories are still way behind our Chinese counterparts when it comes to cost-effective production and efficiency. This condition is also applicable to our automobile and chemical industries. We may not be able to supply global electronics companies with enough engineering components. Therefore, both the government and private corporations need to work together to address this issue to ensure sustainable MSME growth, but it will take a long time.
What ViTWO Thinks About the Current Situation?
Looking at the situation, it can be said that things can be turned around in favour of Indian MSMEs if the right steps are taken. Apart from building scalability, we need to be more cost-competitive than other countries in order to gain more market. However, one challenge that might become an issue for domestic companies is if the Indian government opens the market to the US companies as part of the negotiations. Therefore, the situation currently presents both challenges and opportunities for our Indian companies, as the US Tariffs redefine the balance of global trade and the future of MSME growth in India.