Suresh Prabhakar Prabhu & Sabyasachee Dash
A silent revolution is happening in India; the country is changing rapidly right before our eyes. This is an India significantly powered by Small and Medium Enterprises (SMEs). The SME sector, with about 36 million units, is being touted, and rightly so, as the backbone of India’s burgeoning economy.
Whether it is agriculture, manufacturing or the services industry, SMEs are mushrooming across the country. Statistics show that SMEs account for 45 per cent of industrial output and 40 per cent of the total exports in India. The sector has employed 60 million people and creates 1.3 million jobs each year. The sector has also emerged as a key factor in urbanising rural India.
However, despite their contribution to the socio-economic growth of India, SMEs are not immune to challenges impacting their growth. Many are reluctant to grow, resulting in reduced productivity. Others cling to staying small and comfortable, avoiding regulatory and taxation hurdles. Those that choose to grow, have a different set of problems to deal with – starting with financing.
A survey of more than 15,000 listed and unlisted companies from diverse sectors such as textiles, power, agriculture and IT&ITES, has shown that the exposure of SMEs to bank credit was falling drastically, owing to high interest rates. Repayment timelines are another reason for SMEs shunning bank credit. Most big companies get interest-free repayment timeline of 120 days; but SMEs get only 60 days for repayment of loans with interest. This has made SMEs reduce their exposure to bank credit.
A quarter-on-quarter reduction in exports has also seen demand slowing in European countries, turning the tables on SMEs. Because these companies are not market leaders in their segments, they have no bargaining power in the price battle. Supply chain inefficiencies, global and local competition and insufficient skilled manpower can choke SMEs.
Due to these challenges, Indian SMEs are unable to scale up to full potential, rise to the standards of international peers and become self-sustaining. These challenges should be perceived as untapped opportunities for the SME sector to grow.
The Indian government has been making commendable efforts to empower SMEs to overcome these hurdles. Many banks have introduced easy finance and credit schemes to help SMEs avail capital without hassles. Some technology companies have also launched tailormade products, services and solutions for SMEs.
The SME sector has also gained recognition from the United Nations. According to the United Nations, such enterprises act as first responders to the needs of the society, provide a safety net for inclusiveness and are primary drivers of poverty alleviation and development.
Financing opportunities are critical to ensuring the survival of SMEs, that is, they do not run out of financing options. Some alternative options for funding SMEs in the present day are foreign banks, equity funding, debt funding, mezzanine debt funding, libor for exports, nbfc loans, and grants, among other things.
Further, SMEs have been accused of living in an obsolete era in terms of technology. Access to the Internet, resources, skilled workers and client opportunities can help them grow by leaps and bounds. They are now waking up to the fact that technology and culture of innovation can be potential drivers of growth.
In a recent global study conducted by Oxford Economics, involving 2,300 SME executives, over 60 per cent agreed that technology can be a key differentiator for SMEs and over a third of them agreed that creating a culture of innovation was a top priority in their strategic growth plans.
Tech can be used in multiple spheres. It can make SMEs agile, improve innovation, fortify customer relationships and help explore new markets, while reducing the cost of expansion. Specifically, Big Data Analytics and MobiTech were the biggest drivers of change.
Some recent initiatives of the Government have boosted SMEs. The government has allocated 20,000 crore to this sector through the Micro Units Development Refinance Agency Bank (MUDRA). Similarly, to promote ‘Zero-Defect’ manufacturing with Zero-Effect’ on the environment, the government has set up a performance and credit rating system for SMEs called the ZED rating. SMEs will be classified into bronze, silver, gold, diamond and platinum categories. The idea is to help SMEs grow bigger, gain economies of scale and improve the quality of their products.
With low investment requirements, operational flexibility and the capacity to develop appropriate indigenous technology, SMEs have the power to propel India to new heights. Looking at the current trends, it seems India may one day overtake China in its SME volume. But Indian SMEs must ramp up the quality of their product offering and transfer benefits to the end consumer.
Starting a business today is a lot simpler than before. There are accelerators, incubators, investors and mentors available to handhold businesses to ensure they see the light of day. The ever-growing internet or mobile penetration have opened both the international and rural markets like never before. While the atmosphere is rife with challenges, it is also ripe with opportunities. The time is right for us as a nation to sow the seeds, and build a support system, which would allow SMEs to achieve their full potential.
It is an exciting phase when India is forging ahead on the path to growth. There are immense opportunities for the Indian SME sector to grow and thrive. All it needs to do is to adapt to the changing trends and embrace digital skills.
Suresh Prabhakar Prabhu is a Rajya Sabha MP and former Union minister. Sabyasachee Dash, a chartered accountant, is an executive in the private sector.