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Will MSMEs benefit from the declining Wholesale Price Index?

Credit and Finance for MSMEs: The low inflation rate is likely to benefit certain MSMEs who can now avail of raw materials and energy at lower costs.

Credit and Finance for MSMEs: The monthly Wholesale Price Index data rolled out on Tuesday, has brought a wave of optimism to the market. According to the provisional data released by the Office of Economic Adviser, Government of India, the annual rate of inflation in all of India for the month of May 2023 (when compared to May 2022) turned negative,  at -3.48 per cent. 

The month-on-month change in WPI indicates a decline of -0.86 per cent, reflecting an overall decrease in commodity prices across the country. In terms of the annual rate, the highest decline was observed in fuel and power, falling by 9.17 per cent, followed by manufactured products which decreased by 2.97 per cent. It is worthwhile to note that in June 2022, the WPI inflation had reached a worrisome 15.18 per cent, mainly due to the turmoil in the global economy, particularly the Russia-Ukraine war which led to fuel and power inflation surpassing 40 per cent year-on-year.

The Consumer Price Index (CPI)-based inflation also cooled down to a 25-month low in May 2023 at 4.25 per cent, compared to 7.04 per cent a year ago. This trend of falling wholesale inflation rate has continued for a year, since it peaked in May 2022 at 16.63 per cent. 

The government, in its statement, attributed the “fall in prices of mineral oils, basic metals, food products, textiles, non-food articles, crude petroleum & natural gas, and chemical & chemical products,” as the reason behind deflation. Manufactured goods, which hold the largest weightage in the WPI at 64.23 per cent, experienced an annual decline of 2.97 per cent. 

The low inflation rate is likely to benefit certain MSMEs who can now avail of raw materials and energy at lower costs. “This trend could provide some relief for MSMEs who have faced the brunt of high input costs. Lower headline inflation could convince RBI to take a more accommodative stance by reducing the repo rates with resultant trickle-down effects on short-term borrowing rates and working capital limits for cash-strapped and margin-squeezed MSMEs,” said Premchand Chandrasekharan, Partner, Avalon Consultancy.

He added, “Tempering prices and interest rates could potentially boost consumer sentiments and spending capacity. So market demand for MSME goods and services could move in a positive direction.”

However, a negative WPI also indicates deflation, which leads to a decline in production. “The positive fallout for MSMEs has been visible in terms of ease of pressure on working capital and competitiveness. It has also resulted in better ROI. But the negative side is that it shows demand contraction in many sectors namely garments, gems and jewellery, and chemicals among others,” said Anil Bhardwaj, Secretary General, Federation of Indian Micro, Small, and Medium Enterprises (FISME)

In all, the cooling down of inflation is a phenomenal feature, at a time when the largest economies are struggling to keep up with the macroeconomic factors. However, the cautionary approach will be continued, considering the volatility of the global economy. For now, the local industry can consider taking a light moment and continue working on pacifying the business activities.