IMPACT OF RUSSIA – UKRAINE WAR ON INDIA’S SME

By BWA Envoy
April 01, 2022
2 Minutes Read

Indian Prime Minister Narendra Modi once promised to scale the heights of space with Vladimir Putin and today Russia’s decision to invade Ukraine could not have come at a worse time for its cold war ally. Russia and Ukraine contribute only about 1 per cent to India’s exports and 2 per cent to the imports but the flurry of sanctions imposed by the US and European Union has the potential to impact India Inc. in many ways.

With covid-19 already showing signs of receding, business owners were expecting to get back to normalcy and start recovering at least part of the losses incurred by the pandemic, but the ongoing war seems to have thwarted their hopes with inevitable price inflation and a disrupted supply chain.

Oil prices recently went above $130 per barrel in the international market, leading to increased fuel inflation in India. On the currency side, the Indian Rupee also witnessed depreciation against the US dollar which would, in turn, increase the cost of products in India. Consumer Price Inflation (CPI) is already above the tolerance band of 6%.

Impact on SMEs:

SMEs’ share in India’s exports is expected to be as much as 80%, which in FY21 was 49%. Since most of the trade to Ukraine and Russia has been from SMEs the current crisis will lead to a delay in exports with logistics disrupted, exports on hold and even if shipments are released, industry experts flag a fear of blocked payments which would, in turn, block the working capital cycle of major SME’s in India. Almost every industry is impacted with the major ones being engineering, steel & pharmaceuticals.

Russia and Ukraine being net exporters of steel, the disrupted supply chains would led to an increase in steel prices in the short term which will ultimately be borne by consumers. SMEs in the textile industry witnessed a massive impact as far as exports are concerned because key markets like Europe and Russia have already seen a temporary halt in trade activities. Companies in pharmaceuticals have also begun to show negative consequences as India exports a lot of medicines to Russia and Ukraine. Since pharma exporters ship consignments every quarter, if the war continues long then exports would be hampered.

Funding constraints for SMEs:

With inflation set to worsen after the ongoing war, any increase in the interest rates by the Reserve Bank of India could create an Asset – Liability mismatch on the balance sheet of major SMEs on account of the increased burden of EMIs. Higher commodity prices could stretch the working capital cycle for SME’s thereby weakening the debt serviceability.

RBI intervention:

Amid concerns about the emerging payment crisis being faced by exporters due to western sanctions on Russian Banks, RBI has been gathering inputs from domestic banks on the crisis and will issue directions after consulting the government. In the true global village of today, war is not a political solution nowadays given the level of globalization across nations.