Small and Medium Enterprises (SMEs) are an important part of the Indian economy. Though they are small in size, their contribution to any economy cannot be ignored. There is no common definition of SMEs universally, and the parameters defining it differ across countries. They are often characterized on the basis of their size of operations, value of assets, turnover, revenues and employment generation. Apart from these quantitative criteria, a few qualitative parameters are also frequently used to signify it. These include the nature of management and ownership, the area of operations, and the sources of capital. However as a layman, SMEs can be described as small sized firms operating often in their local area, targeting a small market and have limited access to capital. They have a very insignificant market share. Since they have a smaller market share, they also have very little control over the market and price.
SMEs and the Indian economy
The SMEs contribute around 6% of the Gross Domestic Product (GDP) in India and employs some 60 million people in the country. The estimates provide there are 26 million SMEs in the organized sector in India. The importance of SMEs in India can be assessed well with the fact that they occupy 90% of the industrial units in the country. The sector also contributes 40% of the total exports. But at the same time, SMEs in India are confronted with critical challenges of availability of finance, skilled manpower, limited access to technology and markets. However, a number of these challenges that they face in their routine business activities relate to their lack of business knowledge and training. The entrepreneurship in large number of SMEs in India suffers from a knowledge gap and they hardly know proper procedures of bookkeeping, accounting, manpower training, organizational governance and marketing. Most of the SMEs are still not affiliated by any rating agencies. Moreover, large number of the SMEs also lack proper succession plans further adding to the risks of their long-term survival. Financial institutions thoroughly scrutinize all such factors before sanctioning any finance to the SMEs. Lack of capital leads to all the further problems for them regarding technology and manpower acquisition.
Future of the SMEs
As Mr. Kamath, the non-executive chairman of Infosys recently claimed, the future belongs to SMEs. In India, the economy is largely agriculture based and a major chunk of output is contributed by rural India. Most of the agro-based units in rural India are SMEs representing the strong potential of SMEs in economic growth of India. However, the potential lies for all over the globe. A recent article in Harvard Business Review also focused on the importance of SMEs by suggesting that if an economy promotes its SMEs, it leads to diversification of the economy and thus it becomes less vulnerable to sector-specific shocks. But to realize their true potential, the SMEs need to re-structure their organizations and modernize their management practices.
- Lemmon, G. (June 28, 2012). “Promoting Entrepreneurship in Vulnerable Economies.” Harvard Business Review.
- PTI (August 17,2012). “Keep proper account books to get easy loans: Experts to SMEs.” The Economic Times.
- PTI (February 24, 2012). “SMEs will define next decade: Infosys’ KV Kamath.” The Economic Times.