India Ratings and Research (Ind-Ra) has warned that the imposition of reciprocal tariffs is likely to worsen the financial strain already faced by India’s micro, small and medium enterprises (MSMEs), particularly amid escalating global trade tensions being referred to as "tariff war 2.0".
While mid-sized corporates (MCs) are expected to withstand the external shocks more effectively due to stronger financial health and operational resilience, MSMEs—often characterised by limited financial flexibility and narrower management bandwidth—are deemed especially vulnerable to economic pressures and demand slowdowns.
According to Ind-Ra’s latest analysis, based on data as of 31 March 2024, nearly 23 per cent of MSMEs remained financially stressed, compared to 11 per cent of mid-corporates.
The agency stated that although the credit profile of these enterprises has broadly returned to pre-COVID levels, the pace of recovery remains uneven.
The research is based on a detailed assessment of 1,898 listed and unlisted MSMEs and 1,055 mid-corporates.
It reveals that MCs are in a much stronger position to absorb financial shocks, benefitting from healthier credit metrics, better access to capital and more robust operational structures.
"Capex intensity is usually low as MSMEs grapple more with working capital issues than MCs, and need adequate finance at competitive rates to manage those," said Neermoy Shah, Associate Director – Emerging Corporates at Ind-Ra.
“Additionally, MSMEs – unlike MCs – are largely promoter-driven entities and lack a capable second line of management with the skills to negotiate effectively with lenders, suppliers, and customers.”
The analysis suggests that reciprocal tariffs will have a "moderate to high intensity" impact on MSMEs, particularly those with annual revenues under ₹250 crore and plant and machinery investments under ₹5 crore.
MSMEs have made modest capital investments post-pandemic, but these remain below historical averages. Furthermore, a lack of improvement in interest coverage ratios and the sustained presence of loss-making MSMEs point to their heightened vulnerability to external disruptions.
Externally, factors such as weakening global consumption trends and a general economic slowdown—exacerbated by the evolving trade tensions—may weigh heavily on MSMEs' operations and credit standing.
The latest phase of the trade conflict was triggered earlier this month when US President Donald Trump announced the imposition of reciprocal tariffs on countries with which the United States has a tariff imbalance.
On 2 April, the US government introduced a 90-day pause on most reciprocal tariffs, reverting to a universal 10 per cent rate on most targeted nations.
However, the administration took a more aggressive stance against China. On 9 April, tariffs on Chinese goods were raised to 145 per cent, followed by another increase on 16 April, pushing rates on certain Chinese exports to as high as 245 per cent.
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