Need for bold changes in policy

India's growth story is significantly dependent on developing a strong SME sector.

By Sanjay Aggarwal  
Saturday, March 4, 2017

India's growth story is significantly dependent on developing a strong SME sector. India's GDP is estimated to grow from $2 trillion to $5 trillion by 2025, with significant contribution by the services segment (approximately 60 per cent), followed by manufacturing and agriculture - the growth drivers being significant investment and expenditure by the government and the private sector. These comprise a range of infrastructure projects - smart cities, river waterways, airports, ports, urban transport, power plants, bridges, dams, roads, defence, railways - across multiple business segments such as telecommunications, health care, education, aviation, tourism, housing, renewable energy, automobile, digital, skilling, sanitation, mining, industrial and market clusters (Make in India), and many more. These investments are in response to the expected increase in domestic demand arising from significant growth in the number of households and their purchasing power over the next decade. This is likely to lead to significant growth in per capita consumption across business segments.

The ability of large corporates to achieve sustainability and competitive growth both in domestic and global markets is dependent on the development of a strong SME vendor and supply chain ecosystem. India's domestic market is diverse and complex. In order to meet the growth in domestic consumption, the manufacturing and services sectors will have to keep developing their value chain from procurement and sourcing, processing and conversion, to sales and distribution across the growing urban and rurban market segments in an efficient and cost-effective manner. This will require the development of an SME ecosystem at national and regional levels in order to be successful on a sustainable basis. The nature and extent of investment in the SME segment by the government and large private corporates are required to increase significantly.

The government and large corporates should change their mindset and approach towards the SME segment; else, it will be a challenge to develop a strong SME ecosystem to support their own growth plans and efficiencies on a sustainable basis.

The SME ecosystem on its own is continuously developing in response to the growing demands and needs of the government as well as the large corporates. Further, the growth in domestic demand explained earlier, especially in regional, rurban and rural markets, would also be met by the regional and SME segment. Reducing dependence on imports for domestic demand is an important area where SME development and growth can play an important role.

The SME ecosystem is further expected to be the one of the largest employment generators including entrepreneurship as the first career choice. India has to generate new employment for 10 million people on an annual basis, and the government and large corporations are unlikely to be able to meet this requirement entirely on their own. The growth of the SME segment is expected to fill this gap. The ease of doing business issues continue to be a deterrent in the emergence of a stronger SME segment.

SMEs need a supportive environment to develop and grow stronger. SMEs now include many new-age businesses and also the services sector. The change in approach required starts from defining SMEs in India in the global context. The SME investment and turnover threshold need a large correction. The thresholds should be increased in a systematic manner over the next decade in line with the global thresholds.

SMEs not only need significant support to stabilise in their formative years, they also need further support to make constant investment to improve their quality and reliability, adopt new technologies, make processes efficient, develop skills and train employees, and innovate. The typical medium- to long-term gestation period from the time an SME makes these investments to the time it realises additional revenue, margins, net positive cash flows and cost efficiencies is very critical. Further, certain adverse changes or volatility in economic cycles further impact their ability to realise the desired benefits in the planned time-frame. The additional direct and indirect costs arising from the adversities and challenges owing to the lack of sufficient ease of doing business leads to a significant drain on the otherwise constrained management bandwidth and resources at the disposal of SMEs. This impacts their ability to be competitive, to make investments for growth on a regular basis and their ability to sometimes sustain operations in short-term business volatility. This problem is further accentuated by funding long-term growth by short-term resources and increased debt and interest burden.

Entrepreneurship can be encouraged and energised by creating an environment which allows the entrepreneur to focus largely on business and market challenges, and much less on regulatory and administrative issues.

The views expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India

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