SMEs have rebounded post-Covid, but urgent challenges are threatening India’s growth momentum

Jugaad. there’s no English synonym for this Hindi word that roughly translates to a simple fix or a frugal solution. It has been used by most Indians at one point or another. But, for a vast number of India’s small businesses, it is an intrinsic part of life, for they continue to exist, operate, and often grow despite the numerous challenges thrown at them.

The scale of those challenges is clearly visible in recent data that shows that India’s informal sector enterprises are yet to fully recover from the body blow they suffered after the outbreak of the 
Covid-19 pandemic. The recently released factsheet on the Annual Survey of Unincorporated Sector Enterprises (ASUSE) for 2021-22 and 2022-23 reveals that the number of unincorporated enterprises fell to 5.03 million in the April-July 2021 period during the second Covid-induced lockdown, but rebounded in the following months and the figure for the whole of 2021-22 rose to 59.7 million. There was a 5.88% increase in 2022-23 to 65 million units. But compare that with the pre-pandemic period, and the increase is minimal. In the ASUSE 2015-16, there were 63.3 million unincorporated firms in the country.

The number of workers employed by these establishments, the country’s largest non-farm employers, is yet to recover. It was 111.2 million in 2015-16, and even after the post-pandemic recovery, the employment figure stands at 109.6 million in 2022-23.

Experts believe that the numbers are a telling indicator of the health of India’s small businesses, or micro, small, and medium enterprises (MSMEs), and much more needs to be done to not just revive them but make them a force to reckon with.

That’s a priority because MSMEs contribute a third of the country’s GDP, about 36% to the gross value addition in the manufacturing sector, and 45% of national exports. According to the Udyam portal, a total of 45.6 million MSMEs are registered with the government, of which 44.8 million are micro enterprises, 706,000 are small, and just 67,378 are medium businesses. Together, they employ 198 million people.

Santosh Mehrotra, labour economist and retired professor of Jawaharlal Nehru University, notes that in recent years, informal sector enterprises have been affected by the trifecta of demonetisation, the introduction of the goods and services tax or GST (which sent the economy into a slowdown), followed by the nationwide lockdown due to the Covid -19 pandemic.

“The government has not released the survey results for 2019-20 and 2020-21, and one cannot assess the impact of demonetisation and GST on the informal sector,” Mehrotra says, adding that the sector is believed to have been severely impacted. “The data for 2021–22 shows that they were impacted by the lockdown, and they have continued to remain impacted, as can be seen from the number of workers that were employed, which remains low. The growth in the number of establishments has also slowed down,” he says.

Santosh Mehrotra
Labour Economist and Retired Prof
JNU

 

Before these disruptions, he says, between 2010 and 2015 (the earlier points in time when the survey was conducted for which data was available for the number of unorganised enterprises and also workers), many more enterprises were set up and millions of more jobs were created. “By contrast, between 2015 and 2023, just a fraction of those units and jobs were created in the unorganised and MSME sectors. Clearly, the improvement between 2021-22 and 2022-23 is a mere fraction of the lost enterprises and jobs induced by the three shocks before the second Covid wave of 2021-22,” he says.

Besides, this is a vast space and MSME is an umbrella term that denotes anything from single-person businesses running out of a house to larger ones providing raw materials and components to Indian and foreign firms that employ in the thousands. So a common solution may not be possible.

Not surprisingly, then, ensuring they have adequate access to formal credit, new technology, and markets, as well as solving the myriad problems entrepreneurs in the sector face, can boost the country’s exports and GDP and create a large number of employment opportunities.

In fact, a recent report by the McKinsey Global Institute (MGI) on MSME productivity highlighted that while MSMEs constitute about one-third of India’s business economy and generate 62% of employment, they struggle for productivity and are only 26% as productive as large companies (compared with 29% in emerging economies). “Narrowing the gap is equivalent to about 10.5% of India’s GDP,” it underlined.

The report, titled ‘A Microscope on Small Businesses’, also revealed that in India, only about 10% of large companies in 2022 were MSMEs at some point after 2000. “Indeed, previous MGI research found that India has a ‘missing middle’ of mid-size companies. MSMEs have faced structural barriers, such as the high cost of compliance and finance, that have tended to constrain their growth,” it said. 

Experts and stakeholders have often highlighted many of these issues, and to be fair, the government has also been working on many of them, but arriving at a simple solution in most cases has not been easy. Efforts to formalise MSMEs through the Udyam Portal and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) have been some of the notable initiatives.

A comprehensive review of the MSME Development Act, 2006, is underway, and it is expected to review the definition of these firms and bring them into sync with current realities. Expectations are that the new government will take many of these discussions forward in the coming months.

Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises (FISME), notes that there are several challenges related to banking and finance, as well as boosting productivity and competitiveness. “There needs to be an MSME-focussed bank with branches in every district of the country,” he underlines, noting that the Small Industries Development Bank of India (SIDBI) is not a consumer-facing bank. He also adds that measures must also be taken to work on the sustainability initiatives in the sector, given that India wants to be a net-zero economy by 2070.

Ketul Acharya
President
Global Alliance for Mass Entrepreneurship

 

In its petitions to the government, FISME has also called for a review of the non-performing assets norms for MSMEs as well as the bank rating required for loans beyond a certain threshold. These would have to be tweaked for MSMEs, and they cannot be treated on par with large companies.

Ketul Acharya, President of the Global Alliance for Mass Entrepreneurship (GAME), says MSMEs can be large-scale employment generators, especially for women. But there are several challenges these businesses face, including access to formal credit, a high bureaucratic compliance burden, access to markets, challenges in getting skilled manpower and providing adequate remuneration, as well as the use of digital infrastructure and payments. He suggests three broad policy focus areas. “There has to be a shift in the mindset of the youth from being job seekers to job generators and to one of entrepreneurship. Can something more be done on this on the policy front, along with the Atal Incubation Centre?”

Acharya also calls for enabling easier access to credit in terms of getting working capital and loans and more efforts from both the Centre and the states to improve ease of doing business. “The government can highlight role models and reward them on the lines of a one district, one-entrepreneurship award,” he says, adding that this can be done especially for women entrepreneurs.

In the following pages, we delve into these issues and look for possible solutions. For India to build on its growth momentum, it is vital to take care of MSMEs and provide them with institutional support to ensure that they don’t have to rely on jugaad.