Scope of business and investment opportunities for Indian SME and manufacturing sectors
India is the largest SME market in the world and contributes nearly a trillion dollars to the economy. It has contributed around 36% of India’s total manufacturing output, and the sector is expected to contribute over $2 trillion to the Indian economy and create 50 million additional jobs by 2024.
Monday February 27, 2023,
7 min Read
Small and Medium Enterprises (SMEs) are the heartbeat of Indian economy and one of the key drivers of the country’s industry sector. Not only do they contribute one-third to the Gross Domestic Product (GDP) of the country, but they are also the key providers of employment to a large segment of the population, particularly among the non-formal sector. They contribute significantly to the socio-economic development of the country by providing job opportunities to the economically challenged segments of the society.
In the past few decades, the sector has become one of the most active and dynamic in India. It is actively expanding its sphere of influence across numerous economic sectors, creating and providing a wide variety of goods and services to satisfy domestic and international market demands.
With the SMEs and manufacturing sector contributing significantly to the GDP of the country, there is a potential to increase their contribution to employment as well to over 50% over the next decade. It is also vital for informal SMEs that are not registered to be made part of the formal SME ecosystem. The growth incentives in the form of privileges and direct benefits for SMEs will encourage registration and participation in the growth opportunity.
Typically, the SME and manufacturing sectors can provide larger employment opportunities at a comparatively lower capital cost, especially in the rural and remote areas, by becoming a part of the industrial ecosystem and act as ancillary units for large businesses to support the system in growth and development.
Our country needs to create 10 million to 15 million job opportunities per year over the next decade to provide gainful employment to its population. SME and manufacturing sectors can contribute significantly to employment generation and the development of the Indian economy. The sector is also one of the key drivers for India’s transition from an agrarian to an industrialised economy.
These sectors account for a large share of industrial units as well. It is also important to see that adequate growth is met across services, manufacturing, and agriculture segments to ensure holistic and stable overall economic growth.
The current growth of SME and manufacturing sector is non-uniform and there exists a significant gap in growth of enterprises across services and manufacturing sectors. Additionally, steps to lower this gap must be taken for a balanced growth outlook.
Promotion of FDI
India has one of the most liberalised foreign direct investment (FDI) policy across the globe, wherein 100% FDI under automatic route is permitted in many sectors. The FDI policy equally applies to the SME sector. To ensure that along with attracting investment, contemporary and cutting-edge technology is brought into the nation to boost overall productivity and competitiveness of the SME sector, a liberalised FDI policy should be followed.
The investor friendly policy on FDI will attract multinational companies, which help in accelerating job creation, increase in tax revenue, and aggregate productivity across the country. Meanwhile, almost all emerging economies have policies and investment strategies aimed in part at recruiting large multinational companies to operate in their country, so that it will boost their economy. Additionally, these initiatives can result in a significant rise in the share of large firms in a short duration of time.
Market size of SMEs in India
The SME sector, comprising of IT, manufacturing, infrastructure, service industry, food processing, packaging, and chemicals, has emerged as the most vibrant and dynamic engine of growth of Indian economy over the past few decades.
The sector is considered as the backbone of the Indian economy, contributing to 45% of the industrial output and 40% of India’s exports, employing 60 million people, creating 1.3 million jobs every year, and producing more than 9,000 quality products for Indian and international markets.
According to the MSME report of FY 21-22, there are 30 million SMEs in the country and 12 million more workforce are expected to join the SME sector in the next three years. Additionally, the sector is growing at a rate of 8% per year.
With the Indian economy expected to touch $5 trillion by 2025, and with revolutionary economic reforms kicking in, SMEs are expected to play a vital role in sectors like ecommerce, food processing, defence, pharma, security, etc.
Promoting SME clusters
A cluster is usually a group of companies/enterprises located within an identifiable and as far as practicable, contiguous area and producing same/similar products/services. Our country should have policies to promote SME clusters in sectors such as automobiles, food processing, textiles, and pharma.
Keeping this in mind, the Centre has adopted the cluster development approach as a key strategy for increasing the productivity and competitiveness as well as capacity building of SMEs and their collectives in the country. Together, these clusters can function as a sizable company, taking advantage of scale and scope to boost output and employment inside their own clusters.
Schemes for SMEs in India
A few initiatives by the central government have given a boost to SMEs. Let’s take a look at these schemes in detail:
1. Make in India: The Central government’s ‘Make in India’ initiative has played a key role in promoting businesses and pushing Indian SMEs to manufacture, develop, and assemble products made in the country.
2. Financial assistance to SMEs in the ZED Certification Scheme: The scheme aims to instill Zero Defect & Zero Effect (ZED) principles in Indian MSMEs’ manufacturing. Under this scheme, the government grants up to an 80% subsidy to MSMEs.
3. The Prime Minister’s Employment Generation Programme: This scheme, set up by Khadi and Village Industries Commission (KVIC), was to finance MSMEs.
4. Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE): This scheme was implemented by the Centre to eradicate the financing issues faced by Indian SMEs and provides collateral-free loans to individual, micro and small enterprises.
5. Government Initiatives for Technology Advancement and Innovation: The central government is trying to improve the conditions of MSMEs in India and has implemented several initiatives to help advance the technology and promote innovation among Indian SMEs. It also helps to promote innovation, national manufacturing competitiveness programme (NMCP), rural industry & entrepreneurship (ASPIRE), etc.
These initiatives by the central government are helping SMEs overcome issues like financing, technology, etc.
What lies ahead?
The SME and manufacturing sector are the backbone of a resilient national economy and their ability to stimulate demand, create jobs, drive innovation, and establish competition make them an integral part of the economic construct. Hence, prioritising their development is critical for the future of the country.
The government’s recent announcement to provide 15% equity investment in listing of new SMEs through a government pool is a step in the right direction. We need more such measures to show that SMEs in India have full-fledged backing of the government.
Especially in the current environment, the government’s push to SME and manufacturing sector can play an important role in providing capital to the productive segments of the economy. An increased reliance on capital market funding will ensure that in the long-term, SME growth is not constrained due to any short-term setbacks and the growth momentum can be sustained for a long period of time.
With low investment requirements, operational flexibility, and the capacity to develop appropriate indigenous technology, the SMEs have the power and ability to propel the Indian economy to greater heights. Imagine an India that has empowered SMEs sector to maximise their growth propulsion, resulting in a significant boost to the growth of the country as a whole. Additionally, it’s crucial for India’s SMEs to ramp up the quality of their product offering and transfer benefits to the end consumer.
But there are several challenges faced by SMEs that hinder the growth opportunities. Hence, it is the responsibility of the Government of India to design wise policies and implement it to overcome the problems faced by SMEs.
Further, the government should also arrange for various alternatives for financing of SMEs. They should also be technologically and skilfully upgraded. A well-formulated package offering support to SMEs is essential to build on their strengths in the future. The government should start implementing the above strategies for strengthening and upgrading the production potential and export orientation of SMEs.
Edited by Megha Reddy
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)