Indian small businesses struggle to pass on rising input costs

Harmony Foods, which produces flour, faces similar pressures for entirely different reasons.

Russia’s invasion of Ukraine sent wheat prices up 15%. In addition, packaging material costs have increased by 15-20% over the past six months.

This, in an industry where price fluctuations are typically limited to 1-2%, said Virat Maheshwari, head of sales at Harmony. Supply in the industry exceeds demand – so it is difficult to raise prices. Plus, the cost of production is the same for most players, he said.

As such, margins are a function of cost price, Maheshwari said.

Along with costs, price volatility adds to the uncertainty Harmony Foods faces. “Without price stability, it’s hard to decide whether to buy or not,” Maheshwari said.

MSMEs are on hot coals due to the cost of raw materials, said Manguirish Rai Panicker, outgoing president of the National Council of MSMEs at ASSOCHAM. “With rising prices, sourcing and sourcing has also become difficult for some MSMEs as they need these materials in limited quantities,” he added.

According to Panicker, the metalworking sector is the hardest hit in terms of rising input costs. Industries using crude and chemicals also saw a sharp increase in costs. Cutting costs also doesn’t help because of the scale of the price hike, he said.

Rising prices have also made it difficult for MSMEs to honor their export commitments, as these contracts are not as easy to renegotiate as domestic companies, Panicker added.

The abnormal rise in raw materials has hit small industries hard and is disrupting them, said Suman Chowdhury, director of analytics at Acuity Ratings. “It could lead to liquidity issues and even impact their ratings,” he said.

Prices can only be passed on when the recovery of the economy is steady and consistent. That remains to be seen, Chowdhury said. Private consumption remains below expectations and until this is corrected, the input cost pass-through conundrum is likely to continue, he said.

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