Ease of Doing Business for MSMEs: The impact of inflation on family-run small and medium enterprises (SMEs) is far greater than is suggested by the current retail or wholesale inflation rates estimated by the government, said a study by Bharatiya Vidya Bhavan’s SP Jain Institute of Management and Research (SPJIMR) on Tuesday. According to the study, a vast majority of such enterprises have resorted to price rise due to a significant jump in operating costs – a strategy that may not be sustainable.
The average increase in operating costs reported by family-owned SMEs is 19.5 per cent, according to the study, far above the Consumer Price Index (CPI) retail inflation rate that touched 6.07 per cent in February, as per the data released by the National Statistical Office (NSO). On the other hand, the Wholesale Price Index-based inflation had surged to 13.11 per cent.
83 per cent respondents in the study said they have increased their prices in response to such cost increases. In order to cope with it, the enterprises improved their receivable collections and cash flow cycles through renegotiating contracts though they haven’t pursued grammage reductions or quality reductions as responses to rising costs. The study also noted that SMEs expected costs to further increase over the coming three to 12 months, with a majority of the enterprises planning to hike prices in the following three months.
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“Our survey reveals the large and unsustainable impact of raw material cost inflation on Indian family enterprises. While most family SMEs are mimicking large corporations by raising prices and passing on cost increases to their customers, we question whether SMEs have the required branding and pricing power to sustain this approach over the medium term,” said Tulsi Jayakumar, Executive Director, SPJIMR’s Centre for Family Business & Entrepreneurship and author of the report in a statement.
The proportion of manufacturing enterprises reporting cost increases was statistically larger at 24 per cent than that of service enterprises that reported an increase of 14.4 per cent. Other reasons cited for increasing operating costs were the increase in energy and fuel prices, transportation costs, and labour costs. The study was undertaken in March and involved 170 family enterprises as respondents based in 65 Indian cities.