The sharp rise in freight rate would impact medium and small entities, Ind-Ra’s Soumyajit Niyogi said. File
| Photo Credit: C.V. Subrahmanyam

A recent four-fold spike in container freight costs, could hit Indian exporters’ profit margins and enhance their working capital requirements through 2024-25 if there is no respite soon, with smaller players likely to face a worse impact, India Ratings and Research (Ind-Ra) warned on Monday.

While freight rates had corrected significantly after the surge witnessed in 2022 after the COVID pandemic due to supply chain bottlenecks, the correction in freight and forwarding cost of Indian corporates was lower than that for international freight and forwarding cost, and is likely to inch up in this financial year, Ind-Ra noted.

“After a brief lull period, the global trade is expected to gain traction, and for that undisrupted sea trade and conducive freight rate are essential.

The sharp rise in freight rate is more detrimental for the medium and small entities with thin margin,” says Soumyajit Niyogi, Director, Ind-Ra, adding that the working capital cycle, which had peaked during the pandemic before reverting to the mean, is also showing signs of lengthening this year.

While part of the uptick in global freight rates could be a surge in Chinese exports seeking to beat the duty protections kicking in the U.S. from October 1, the firm said freight rates are still likely to rise further. It attributed this to the higher usage of fuel and rising insurance risk premia due to the disruptions in the Red Sea as well as a 24% drop in merchandise trade flowing through the Panama Canal this year.

“Increased travel time and expansion of trade routes are causing congestion at the main ports, thus increasing the turnaround time for ships and adding further to the cost,” the rating agency observed.

Its research note is based on an analysis of 102 listed corporates with 25% or more of revenues and/or raw materials sourced from foreign trade for the period 2018-19 to 2023-24.

“If sustained, the surge in container freight rates could affect the business operations, EBITDA margins and working capital of exporters during FY25,” Ind-Ra concluded.

KOCHI, Kerala, 27/01/2023 : Job seekers attend a job fair. File
| Photo Credit: Thulasi Kakkat

The economic loss, particularly to India’s informal sector owing to the cumulative impact of macroeconomic shocks since 2016, including the demonetisation of high-value currency notes, the rollout of the Goods and Services Tax (GST) and the COVID-19 pandemic, is estimated at 4.3% of India’s GDP in 2022-23 or ₹11.3 lakh crore, India Ratings and Research said on Tuesday.

Noting that the sector was “severely impacted” by recent macroeconomic shocks, India Ratings’ principal economist Sunil Kumar Sinha estimated that 63 lakh informal enterprises shut down between 2015-16 and 2022-23, with about 1.6 crore jobs lost. “This period also coincided with the rise in the formalisation of the economy, which has led to robust tax collections. While formalisation of the economy is the way forward, the reduced unorganised sector footprint has implications for employment generation,” Mr. Sinha said.

In 2022-23, the Gross-Value Added (GVA) in the economy by such unincorporated enterprises was still 1.6% below 2015-16 levels. Moreover, their compounded annual growth rate (CAGR) was 7.4% between 2010-11 and 2015-16, but slipped into a 0.2% contraction since then, the rating firm reckoned based on the recently released findings of the government’s Annual Survey of Unincorporated Sector Enterprises (ASUSE).

As per the survey, the number of establishments in the non-agricultural sector increased to 6.5 crore in 2022-23 from 5.97 crore in 2021-22, with employment rising to 10.96 crore from 9.79 crore workers. However, this was lower than the 11.13 crore people employed in the sector in the ‘pre-shock period’ of 2015-16. This was primarily due to a decline in manufacturing jobs which stood at 3.06 crore in 2022-23, compared with 3.6 crore in 2015-16.

The latest data suggests that the real GVA of unincorporated firms in manufacturing, trade and other services (MTO) was ₹9.51 lakh crore in 2022-23, with an 18.2% share in India’s real MTO GVA, falling sharply from 25.7% in 2015-16.

“The shrinkage has been sharper in other services and trade, with the informal sector’s share dropped to 32.3% and 21.2% in 2022-23 from the pre-shock level of 46.9% and 34.3%, respectively. In the manufacturing sector, the share of the informal sector fell to 10.2%, from 12.5% during the same period,” the firm said in its report.

Had the macro shocks not taken place during the post 2015-16 period and the growth in these enterprises followed the pattern between 2010-11 and 2015-16, the total number of such firms would have reached 7.14 crore in 2022-23, with the number of workers employed rising to 12.53 crore, India Ratings concluded.

The unorganised sector contributes over 44% to the country’s GVA and employs nearly 75% of the work force employed in non-agricultural enterprises, as per the 2022-23 Periodic Labour Force Survey.

The size of unincorporated sector enterprises (USE) was ₹15.4 lakh crore in 2022-23, growing at a CAGR of 4.3% between 2015-16 and 2022-23l, compared with a CAGR of 12.9% recorded between 2010-11 and 2015-16. “Had the pace of growth of USE remained at 12.9% during 2015-16 to 2022-23, their size in 2022-23 would have been ₹26.9 lakh crore,” India Ratings explained.