Large organizations have the ability to invest more in R&D, production scale and also pay relatively higher remuneration with the better working environment, all of which makes it challenging for SMEs when it comes to size, productivity and quality of employment.
Indian Small and Medium Enterprises (SMEs) are globally recognized for their contribution to job creation, innovation and economic advancement. SMEs provide sustainable, myriad, and effective engines for development. India can achieve the UN Sustainable Development Goals by focusing on unlocking the potential of SMEs. Mukesh Ambani had recently quoted that “Every small business and entrepreneur in India has the potential to become Dhirubhai Ambani or Bill Gates”. We are already witnessing startups, gig economy, disruption, innovation, freelancing, co-working, digital, fintech, artificial intelligence all becoming everyday terms in daily lives.
Large organizations have the ability to invest more in R&D, production scale and also pay relatively higher remuneration with the better working environment, all of which makes it challenging for SMEs when it comes to size, productivity and quality of employment. This productivity gap leads to low income generation, informality and poor growth. Government and policymakers continue to emphasis on SMEs, with over 50 Central and State Government schemes currently supporting SMEs in various counts. This it is bound to have a favourable effect in the long run, but as immediate steps some of the aspects that can help unlock potential for SMEs are.
The Capital Conundrum
Although several schemes exist, effective delivery of government schemes such as the Credit Guarantee Fund Scheme and loans from SIDBI can bring in the liquidity which is the fuel to keep the SMEs going. With social media, internet/online and networking at the core of any successful business strategy, small business owners need to also reach out to various non-govt capital providers like venture capital or private equity funds who are keen to partner to support their growth, innovation and creative disruption.
R&D Investment, Employee Training and Development
Skills shortage for SMEs hinders their growth. Skill training, use of technology are the major areas where a small business must invest and govt should incentivize or subsidize such activities to an extent to kickstart the desired action. Investments in R&D will result in improvement in quality, cost efficiency and better output.
SMEs need to adopt automation to enhance productivity in a manner meaningfully achieves efficiency at a reasonable cost and without impacting job creation. The focus needs to shift to value-added jobs rather than manual work to reduce costs.
Governance and Timely compliances
Size and scale will bring with it need to have controls and governance structures that enable the entrepreneur to remain focused on business. This will also improve the reputation and image of SMEs and help to attract private capital.
Transition to Organized Structure
SMEs typically operate their business privately as proprietorship or partnership firms which are generally considered to be a loose structure with unlimited liability exposure and inability to induct investors. A transition to a corporate structure would bring more credibility, reduce the tax burden, permit issuing stock options to attract, reward and retain employees and facilitate succession of business through generations.
Significant budget fund allocation towards the SME sector signifies the government’s intention to bring SMEs at the parity level in terms of access to affordable capital. Nevertheless, SMEs are overly relying on government and other external intervention for support at times and need to be conscious that Gates to becoming Ambani will unlock when there is a parallel change in the mindset of SME entrepreneurs. Push must also be from entrepreneurs and family businesses giving them the confidence and conviction to take the leap.
By addressing these top challenges SMEs face in sourcing capital for growth and other infrastructure bottlenecks, the path for growth will get unshackled and the entrepreneurial power unleashed to transform SMEs into global organizations. Unlocking this potential for SMEs will drive the rate of India’s growth and help it achieve the $5 trillion size.
Suraj Malik is the Partner BDO India LLP & Anant Jain is the Director BDO India LLP. Views expressed are the authors’ own.