India’s economic ambitions rest on the ability of its small and medium enterprises to compete on a global scale. The country aspires to sustain a 7-8% growth rate, but this will remain elusive without a thriving MSME sector that is deeply integrated into both domestic and international supply chains. While India has successfully attracted large multinational corporations, the real test lies in making the country an attractive destination for smaller enterprises that drive innovation and create jobs.
One of India’s persistent challenges has been its complex regulatory environment, which disproportionately affects smaller businesses. Unlike China, which successfully brought both large and small firms into its industrial ecosystem, India has yet to create a seamless business environment where MSMEs can flourish. Excessive red tape and fragmented policies across states have made it difficult for businesses to scale, and for foreign MSMEs to consider India as a competitive manufacturing hub.
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If India is to unlock the full potential of its MSME sector, it must encourage stronger linkages between small enterprises and large corporations. Countries like Thailand and Japan have demonstrated how targeted policies can help integrate MSMEs into global value chains, particularly in sectors like automotive manufacturing. For India’s MSMEs to move beyond domestic constraints and play a greater role in exports, they need access to financing, technology, and more efficient supply chain networks.
Lessons from Germany’s Mittelstand
Germany’s economic success is closely tied to its thriving SME sector, which constitutes over 99% of all firms in the country. These businesses generate more than half of Germany’s economic output and provide nearly 60% of jobs. Furthermore, 82% of apprentices in Germany receive vocational training within SMEs, ensuring a highly skilled workforce.
The strength of the ‘Mittelstand’ lies in its commitment to innovation, specialisation, and skill development. A crucial factor behind its success is Germany’s dual vocational training system, which combines classroom education with hands-on apprenticeship, fostering a skilled and competitive workforce. Additionally, Mittelstand firms excel by focusing on niche markets and becoming global leaders in specialised products and services. Indian MSMEs can benefit from adopting this approach by identifying and mastering specific sectors in which they can achieve excellence.
Challenges facing India’s MSME sector
Despite its potential, India’s MSME sector faces numerous challenges, particularly in comparison to China’s well-organised industrial framework. While large corporations can tackle complex regulations and tax codes, smaller enterprises often struggle with bureaucratic hurdles. In contrast, Germany has created a business-friendly regulatory environment that minimises red tape and supports SME growth through export promotion programs, trade fairs, and financial assistance.
According to official data, over 35,680 MSMEs registered on the Udyam portal have shut down since 2019. Experts believe the actual number is higher, given the large number of unregistered enterprises. While the pandemic severely impacted the sector, MSMEs continue to grapple with long-standing challenges such as technological limitations and delayed payments, which hinder their ability to compete with cheaper imports and expand their export potential.
Policy interventions and government support
The Union government has recognised the difficulties faced by MSMEs, and the NITI Aayog is working on policies to incentivise medium enterprises to scale up and integrate into global value chains. To enhance investment conditions, a state-level investment friendliness index is being developed to identify necessary reforms. A comprehensive research and policy agenda is needed to address the sector’s structural bottlenecks and unlock its full potential.
Given that 90% of India’s workforce is employed in the informal sector, including self-employed individuals and small enterprises, government intervention is crucial. The informal sector contributes 50% to India’s GDP, highlighting the need for sustained policy support.
In recent years, MSMEs have faced multiple economic shocks, including demonetisation, the implementation of the Goods and Services Tax (GST), and the pandemic, which collectively led to the closure of many units and the loss of 25-30 million jobs. As the sector regains momentum, government support is necessary to enhance productivity and resilience.
Immediate policy remedies for MSME
Two policy interventions can yield immediate benefits:
Regulatory simplification: India needs a streamlined and flexible regulatory framework to facilitate business operations. A complex web of central and state-level policies currently makes cross-state business expansion cumbersome. Small entrepreneurs should not have to fear an overly rigid compliance regime.
Improved access to credit: MSMEs require easier access to bank credit, with the collateral of an operational enterprise being sufficient. Affordable financing remains a significant challenge, especially as businesses seek to upgrade technology and align with evolving consumer expectations.
Formal, large-scale employment remains elusive for much of India’s workforce, and a significant portion of the economy operates in a regulatory grey area. The informal sector, however, continues to provide employment to millions. Until technological advancements and increased investments bring about substantial changes, the government must prioritise job creation within this sector by addressing the hurdles faced by MSMEs.
India is currently experiencing a golden period where global economic partnerships are expanding. MSMEs have the potential to unlock new manufacturing and export opportunities. By providing the right mentorship, regulatory support, and financial incentives, both the government and the private sector can ensure that MSMEs capitalise on this opportunity. With the right policies and strategic interventions, India can harness its MSME sector to achieve long-term economic aspirations.