SMEs in India are Driving Economic Recovery

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Chetna Kohli, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur


India’s MSME (micro, small and medium enterprises) sector, with 48 million enterprises, contributes 37.5% to gross domestic product, provides employment to 111.4 million persons and accounts for more than 40% of India’s exports. Yet, these small units are considered inefficient compared to their large-scale counterparts. They are shackled by regulations, inadequate availability of funding, orthodox marketing and a lack of access to global markets and skilled workforce.

The ministry of corporate affairs (MCA) has collected data from the audited annual accounts of these small, unlisted, private companies, espcially MSMEs. The data presents a heartening picture because When it comes to return on equity and efficiency, these companies are ticking all the boxes. These firms seem to be saving their way to growth, with growth rates of gross savings going up from 11.6% to 17.9%. They have been net foreign exchange earners, contributing to the build-up of the country’s precious foreign exchange reserves. Such growth in employee remuneration, interestingly, comprises not just of salaries, wages and bonus, but also contributions to provident fund and employee welfare expenses. As such, these trends cannot be dismissed as reflective merely of an increase in wages at the national level. Besides, core sectors like mining and quarrying, manufacturing of iron and steel, fabricated metal products, machinery and equipment, motor vehicles and other transport equipment, and construction have also exhibited dramatic increases in growth rates.

The discrepancy between perception and reality of the Indian growth story calls for the use of a larger database to draw conclusions regarding both growth and equity. More importantly, the new data from RBI points to the new engines for the India growth and equity story—the micro and small enterprises. The government and RBI will need to help them find their rightful place in the economy.

In this context, government schemes such Udyog Aadhaar, Start-up India, Make in India and the steps taken to improve the ease of doing business all indicate movement in the right direction. Similarly, RBI’s initiatives, such as increasing the targets for bank lending to micro enterprises and bringing medium enterprises within the ambit of priority sector lending, will help energize this sector. RBI can also ensure that the bane of MSME existence is resolved through improving the transmission mechanism of policy rate changes, as also better credit flow to the MSMEs.

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