AI adoption in MSMEs can unlock up to $685B potential: Report

Artificial Intelligence (AI) adoption in Micro, Small and Medium Enterprises (MSMEs) has the potential to unlock $490-685 billion in economic value, suggested a report by the World Economic Forum titled ‘Transforming Small Businesses: An AI Playbook for India’s MSMEs’. This represents growth of around 45-62% for the sector. 

The MSME sector presently contributes about $1.1 trillion to India’s GDP (Gross Domestic Product). 

While this represents the potential, the actual value or impact of MSMEs adopting AI can be measured along three levers, the report added.

First, productivity enhancement: AI-driven automation, predictive analytics, process optimisation, and market insights that can boost the overall productivity, and help generate higher revenue per unit input; secondly, AI can help reduce cost by promoting efficiencies in operations, logistics, supply-chain management, and resource management; and finally, financial inclusion, where AI can help capture, document, and assess models to help bridge credit gap and enable formal credit access for MSMEs. 

Initial pilots of AI in Indian MSMEs have shown a productivity increase of up to 20% and cost reduction of up to 30%. Beyond the macroeconomic impact, AI adoption can also lead to direct measurable advantages for MSME entrepreneurs. 

According to the report by the World Economic Forum, AI can cut product costs by up to 32%, operating costs by 24%, and defect rates by 99%. It can also reduce inventory, free up working capital, and boost sustainability, cutting waste by up to 64% and improving energy efficiency by 59%. Overall, AI adoption helps MSMEs improve margins and business performance.

The report added that India lags far behind other countries like the US and China in terms of credit penetration. Only 19% of the total MSME credit demand in India is met through formal credit sources, leaving behind a massive credit gap of $530 billion.

Most MSMEs depend on informal lenders to meet credit requirements. While these informal lenders process loans without the need for extensive documentation, they charge an interest rate typically 12-16% higher than the rate charged by formal lenders. 

For finance, AI can expand formal credit access by using alternative data for risk assessment, helping MSMEs without traditional documentation. Since informal loans often cost more, AI-driven credit models can lower financing costs and shrink loan processing time from weeks to just a few hours.