India's MSMEs face chronic cash flow issues due to delayed payments, but reforms in the Trade Receivables Discounting System (TReDS) aim to improve liquidity by making invoice discounting more accessible and mandatory for PSUs. Meanwhile, India's tire industry experienced its best quarter in years, boosted by GST tax cuts and rural demand, though future growth remains uncertain amid rising costs and capacity expansions.
In this detailed analysis, we explore two significant developments in India's business landscape: the potential relief for cash-starved Micro, Small, and Medium Enterprises (MSMEs) through reforms in the Trade Receivables Discounting System (TReDS), and the remarkable performance of India's tire industry in the recent quarter.
MSMEs have long been recognized as a vital engine of India's economic development. Last year's budget elevated their importance, and this year's budget allocated substantial funds to support their growth, including a new 10,000 crore rupee growth fund for equity support and a 2,000 crore rupee top-up to the Self-Reliant India Fund.
A critical issue MSMEs face is delayed payments from larger buyers, often stretching 60 to 90 days or more. For example, an MSME supplying electrical control panels to a large public sector thermal power company may deliver goods, raise an invoice, and then wait months for payment. Meanwhile, the MSME must cover salaries, rent, and other expenses without access to the cash tied up in these receivables. This situation effectively means MSMEs are providing interest-free loans to their buyers.
By the end of 2021, delayed payments owed to Indian MSMEs totaled approximately 10.7 lakh crore rupees. This imbalance stems from unequal power dynamics where large buyers delay payments without repercussions, and MSMEs hesitate to demand faster payments for fear of damaging relationships.
Globally, invoice discounting is a common solution where MSMEs sell their unpaid invoices to banks or financial institutions at a discount to receive immediate cash. The financier collects the full payment from the buyer on the due date, earning a spread, while the MSME gains liquidity.
However, in India, invoice discounting was underdeveloped before 2014 due to several challenges:
These factors led to a fragmented and inefficient invoice discounting market.
To address these issues, the government passed the Factoring Regulation Act in 2011, creating a legal framework for invoice discounting. The Reserve Bank of India (RBI) introduced the concept of TReDS in 2014, which launched in January 2017 as a regulated electronic marketplace for invoice discounting.
TReDS has grown significantly, with financing throughput increasing from 950 crore rupees in FY18 to 2.33 lakh crore rupees in FY25. Participating MSMEs have seen an average 8% increase in sales and 4% growth in fixed assets.
However, penetration remains low, with only about 1.35 lakh MSMEs registered on TReDS out of over 1.75 crore MSMEs nationwide—less than 1%.
Challenges include:
The recent budget introduced important changes:
These reforms aim to address structural barriers and encourage wider adoption of TReDS, recognizing the critical role of MSMEs in building competitive supply chains.
India's tire sector recently recorded its best quarter in over a year, with companies like Apollo Tires crossing 5,000 crore rupees in quarterly India revenue for the first time, and JK Tires' profits jumping nearly fourfold.
In September last year, the Goods and Services Tax (GST) on tires was reduced from 28% to 18%, significantly improving tire affordability:
This led to a temporary freeze in purchases as buyers awaited the tax cut, causing dealer inventories to plummet. Post-GST cut, inventories normalized, and sales surged.
Companies credited the GST cut and rural market revival for the growth. For instance, MRF linked sales growth to a healthy monsoon, which boosts farm incomes and vehicle purchases.
Apollo Tires also noted that their sponsorship of the Indian cricket team enhanced brand recall in rural areas, translating into sales.
Despite the strong quarter, industry leaders remain cautious:
Tire companies are investing heavily in new factories due to existing plants operating at over 85% capacity:
However, these new capacities will come online only in 3-4 years, by which time demand conditions may change, potentially leading to excess capacity and fixed costs.
Companies have not raised prices to offset input cost inflation, passing GST benefits to customers. They rely on volume growth to sustain margins, but this strategy carries risks if demand softens.
Discounts on Venezuelan crude oil sold to Indian refiners have fallen below $10 per barrel due to higher freight costs and tighter supply, reducing the price advantage.
The Reserve Bank of India has proposed new forex rules to give banks more flexibility in trading on overseas electronic platforms and investing surplus foreign currency deposits in long-term foreign government debt.
India inaugurated its first private sector helicopter final assembly line in Karnataka, led by Tata Advanced Systems and Airbus, to assemble the H125 helicopter for civil and military use, with the first delivery expected in early 2027.
India's MSMEs, long plagued by cash flow challenges due to delayed payments, stand to benefit from recent reforms in the TReDS platform aimed at improving liquidity and financing access. While these changes are promising, widespread adoption and cultural shifts in payment practices remain necessary.
Simultaneously, India's tire industry has enjoyed a strong quarter fueled by tax cuts and rural demand, but faces uncertainties related to demand sustainability, rising costs, and capacity expansions.
Both sectors highlight the complexities and evolving dynamics of India's economic growth story, underscoring the importance of structural reforms and market adaptations for sustained progress.
Disclaimer: This content is for informational purposes only and does not constitute recommendations or endorsements of any stocks, brands, or products mentioned.
