A Strong Macro Story, a Weak Rupee, and the Quiet Squeeze on India’s SMEs
India’s macroeconomic dashboard looks reassuring. GDP growth projections hover between 6 and 7 percent. Inflation is at multi-year lows. Crude oil prices, a critical variable for India’s import bill, remain near USD 60 per barrel, far below the USD 140 levels seen at the onset of the Ukraine war. Financial markets, notwithstanding episodic volatility, remain structurally bullish. SIP inflows are rising, tax collections are robust and GST rationalisation has supported consumption.
Taken together, these indicators should have supported a stronger rupee or at the very least, currency stability. Yet the rupee continues to exhibit persistent weakness. This disconnect raises an uncomfortable but necessary question: if macro fundamentals are supportive, why is the rupee not reflecting that strength?
For India’s small and medium enterprises, this is not an academic debate. It is a balance-sheet problem.
The Export Myth and the SME Reality
Currency depreciation is often framed as export friendly. In theory, a weaker rupee improves price competitiveness in global markets. In practice, this assumption applies selectively, largely to large exporters with deep balance sheets, natural hedges, pricing power and diversified procurement networks. Most Indian SMEs do not operate in that universe.
A significant portion of India’s SME ecosystem is import-dependent before it can export. Inputs, machinery, components, intermediates and digital hardware are sourced overseas, predominantly from China. India imports more than 7,000 product categories from China and SMEs sit at the centre of this dependence.
Point-of-sale machines used for QR payments, automatic data processing equipment, industrial pumps and valves, pharmaceutical ingredients, fertilisers, organic chemicals, dyes, polymers, plastics, aluminium products, glassware and electronic sub-assemblies flow directly into SME supply chains. A weaker rupee raises costs at the very first node of production. For most SMEs, exports are downstream. Import costs are immediate.
When Currency Weakness Becomes a Cost Shock
Unlike large corporates, SMEs rarely hedge currency exposure. Hedging requires treasury sophistication, scale and surplus liquidity, all of which are scarce at the smaller end of the enterprise spectrum.
As the rupee weakens, SMEs face a cascading cost shock. Landed costs for raw materials and components rise immediately. Working capital requirements expand as inventory and receivables become more expensive to finance. Operating margins thin, while pricing flexibility narrows in competitive domestic markets.
Crucially, these costs cannot always be passed on. SMEs often operate as suppliers to larger firms, where pricing power is limited and contracts are fixed. The result is margin compression rather than export windfalls.
Even for SMEs that do export, the benefits of currency depreciation are frequently neutralised by higher import content in their cost structure. Any improvement in topline realisations arrives only after input costs have already risen, eroding the net benefit.
Why China’s Currency Discipline Matters
One mitigating factor has been China’s tight management of the yuan. By preventing sharp depreciation against the dollar, China has avoided exporting inflation through currency volatility. This has moderated, though not eliminated, cost escalation for Indian importers.
However, this also exposes a deeper structural vulnerability. India’s dependence on Chinese inputs means currency weakness does not create an asymmetric advantage. Instead, it transmits cost pressures across manufacturing, electronics, pharmaceuticals, chemicals and capital goods.
Until India meaningfully reduces import dependence or builds export ecosystems with deeper domestic value addition, currency depreciation will remain a blunt instrument rather than a precision tool.
The Cascading Impact on GDP and Employment
SMEs contribute nearly 30 percent of India’s GDP and employ over 110 million people, making their cost structures systemically important. When input costs rise due to currency weakness, the impact does not remain confined to individual balance sheets. It propagates through credit markets, labour dynamics and investment behaviour.
Higher import costs stretch already tight working capital cycles, forcing SMEs to rely more heavily on short-term borrowing at elevated interest rates. As cash-flow volatility increases, default risk rises. Lenders respond predictably by tightening underwriting standards, repricing credit or reducing exposure.
Employment effects follow quietly. Hiring slows, wage growth flattens and informal contracting increases as enterprises prioritise liquidity preservation over expansion. These pressures rarely register immediately in headline GDP data. Instead, they surface gradually through weaker investment momentum, subdued job creation and rising business churn.
Over time, this cumulative drag undermines the very growth base that favourable macro indicators seek to measure.
Why a Free-Floating Rupee Is Not Yet an SME Advantage
India aspires to become an export-led economy with a market-driven currency. That transition requires depth in domestic supply chains, strong intermediate manufacturing and scale-led productivity. India is not there yet.
In an economy where SMEs are still absorbing compliance costs, formalisation pressures and thin margins, currency volatility imposes operational risk rather than opportunity. A free float benefits enterprises that can manage volatility. Most SMEs cannot.
This does not argue for artificial currency control. It argues for institutional realism.
Currency Strength Is Felt on the Factory Floor
India’s macro resilience is real. But macro strength does not automatically translate into micro viability.
For millions of SMEs, a weaker rupee does not signal opportunity. It signals higher costs, tighter margins and greater fragility. Until export competitiveness is built on deeper domestic value addition, currency weakness will continue to burden the very enterprises expected to drive growth.
