SMEs: backbone of Indian Economy!

There was this wave during the 1990’s in the Indian middle class, when we the “Working class of today in our 30’s & 40’s” were either just 10 year olds or maybe going through our teens; and we saw our parents’ generation going through that transformation and struggle of whether to stay in their regular Govt./PSU jobs or actually get out and build something of their own. Simply put, become Entrepreneurs and start their own business. Well the times were very different then. Coming from a middle class background, our parents had to anyway support their folks back in village/small towns, plus take care of their family and save for the future; and after all this still save further to invest in their dreams — The Dream of starting their Own Business.

This was the time when other people, apart from the regular business driven communities like gujrati/baniya/marwari, also wanted to venture into building their own business, and setting up their own company. One of the entrepreneurial town of Gujarat even had this slogan on so many hoardings calling out, “NAUKRI CHODO, VYAPAAR KARO”. More and more people were leaving their corporate jobs to either return back to the family business, or start on their own with their business idea. These people had dreams to build their own successful business, they were happy to start small, rather than working for a big multinational or corporate or a comfortable government job.

Global financial crisis of 2008–09

The Global financial crisis that hit the world a decade back, left lot of larger and stronger economies struggling to get a grip on their GDP. With the super power i.e. USA’s economy crashing and crumbling down, because of the bursting of their subprime mortgage bubble; many countries got affected by the aftermath of it. Of course Europe followed, with international banking crisis hitting the European nations towards the end of 2009. All the major economies of the world were finding it extremely difficult to revive back and get their country’s GDP back on track.

Amidst all of this, India was still standing tall, not so severely affected by this financial catastrophe. This was largely due to the fact that Indian economy was not heavily dependent on the export markets; and more importantly there was major contribution to GDP via the domestic sources.

India as a country is one of the largest consumer of its own produce. We consume a large part of what we produce locally. Our ever rising population has been a boon during the financial crisis.

India’s local producers are of course the SMEs. Since the reforms of 1991, India has moved to more neutral regime for both the exports as well as the imports. It had also relaxed the taxation and other policies for the exports then itself. SMEs held the Indian economy tight and strong during the global financial crisis. The analysts at World bank and IMF thought that with this global financial collapse, India’s growth will also collapse down to 4% in the immediate time, and will recover up to 5–5.5% over a medium time duration. Of course this high level generalization of the global analysis done to India was absolutely off. India was actually doing great at a GDP of 7.8% in 2008. The major contribution clearly being made by the SMEs.

SMEs role in India

SME’s are extremely important to any economy, but are even more critical for developing countries like India where gap between the rich and the poor is increasing day by day and not to forget the headache of unemployment. The recent Oxfam survey stated the same when it mentioned about how a minimum wage worker in rural India will take 941 years to earn equivalent of the top paid executive in a garment firm. SME’s contribute to the Indian economy not only by participating in the development of the mainstream economy, but also with creation of some “decent” jobs.

From Dudley Seers to Amartya Sen, everybody has emphasized, that for the economic development of the country; three factors must be taken into consideration — Reducing the:

Poverty,

Inequality and

Unemployment;

and SMEs do exactly that for the capital scarce developing India. SMEs have not only held the economy of India strong and sturdy during the times of global financial crisis, but they are also the powerhouse of providing huge employment opportunities to people, with a comparatively much lower capital cost than large industries/corporates.

SMEs lead to employment of the local communities by bringing growth and innovation into the business thereby nurturing the local economies. These small businesses employ skilled as well as unskilled workers which are not employable in big organizations, which in turn provides a necessary boost for the reduction of unemployment. The important contribution of SMEs in India is for the promotion of balanced economic development.

The medium, small and micro enterprises provide a cushion for socialistic goals of income equality and regional development.

When these SMEs are set up in the local areas of a region/state, they are also industrializing the rural and backward areas and uplifting and moving them towards progressive state condition; in turn also reducing the gap of income across different regions, and bringing in the balance in income of people across the country.

Also, apart from boosting the local economies, it provides the solution for big organizations by doing their outsourced work at the cheaper costs. This gives a push for big organizations to invest in the country and thereby increasing the gross domestic product (GDP) of India, which is one of the key indicators of economic development for a country.

In their own growth journey, SMEs are contributing massively to the socio-economic growth of India. SMEs play an important role in the economic running of the country.

SMEs are the most dynamic sector of growth for Indian economy. As an engine of growth, SMEs put our country on fast track of socio-economic betterment, with a high octane push.

Following table gives us a clear idea of the basic functioning and contribution of SMEs to the Indian ecosystem for its socio-economic growth.

Product/Service

• High domestic production
• Import substitute

Technology

• Skilled to develop indigenous technology
• contribution to defence technology

Investment/Cost

• Lower investment requirement
• Operational flexibility

Growth/Revenue

• Significant export earnings
• Lower imports
• Tough competition creating new entrepreneurs

Role of SMEs in the well-being of India is not only participating directly or indirectly in the mainstream economy, but also to act as a panacea for economic woes like poverty, unemployment, income inequality and regional imbalances.

Last 3 Decades to last 3 years

SMEs have been budding and running the economy of India for more than 5 decades now. In last 3 decades i.e. from the early 90’s, when the Indian government changed the reforms, SMEs too picked up pace and more and more people started setting up their own business. SMEs industry grew across many verticals like manufacturing, services, textile & clothing, gems & jewellery, packaged food and many more.

Last 3 years have seen some really drastic changes for the SMEs sector on many fronts. Be it the government’s policies supporting and encouraging the SMEs growth; like Make in India, Startup India and Skill India. These policies and programs have been implemented to boost the SMEs growth by the Indian government.

At the same time, the present government’s another focus area — Digital India is also helping the small players get aligned with m-payments and e-commerce.

While the SMEs are trying to grow their business, and with government working on contributing to the same goal, the new Fintech sector has come up and around very rapidly. Fintech start-ups are helping in improving the SME lending for the SMEs.

Support of Indian government in SME growth

Political support amalgamated with financial aid is helping the SMEs to grow. But the question that comes to the mind is, “What’s drawing so much attention to the SMEs sector, that even Prime Minister of India Mr. Narendra Modi has announced a separate initiative — ‘Make in India’?” The answer lies somewhere in its numbers!

SMEs contribute to around 45% of India’s total GDP, which is three times of what big — fat corporates of India do. This sector employs around 46 crore people i.e. almost 35% of India’s population; and is growing at 11.5% annually. Though these numbers are staggering, the importance of SMEs is much more than these numbers to the well-being of India.

With the initiatives like Start-up India and Make in India, Government is clearly putting it out loud and clear that they are here to help the biggest GDP contributor grow by leaps and bounds.

Government initiatives have been majorly trying to cover the key areas of current importance for SMEs.

– Offering credit for technology upgrades,

– Helping manufacturing units with national manufacturing competitiveness program,

– with better awareness of intellectual property rights increasing the competitiveness,

– helping the SMEs tap and develop the overseas market for further growth.

SME lending — Fintech start-ups

All said and done, when it comes to actually moving things and getting working capital for running of your company/SMEs, traditional banks don’t buzz from their age old method of massive paper-work and collaterals. It’s a fact that SMEs face a lot of challenges while trying to secure a working capital loan and credit line. As the banks/large financial institutions have these lengthy procedures and collateral based capital lending, which reduces the loan or credit line accessibility for SMEs. Fintech startups are the new age digital platforms aimed at offering unsecured business loans and credit lines to SMEs with precise credit processing. All this is done with data based algorithms which provide a faster view of an SMEs health and assist with impartial credit distribution. The long application procedures, having a lot of paperwork and collaterals get cut down to minimal, with the use of technology driven scientific data tools that are able to assess the credit worthiness. With the help of these data mining technologies that Fintech start-ups use, they are able to better serve the customer with more precise data driven results.

The benefits of securing working capital through fin-tech start-ups v/s traditional lenders are:

1. Accessibility — Fin-tech start-ups like OfBusiness, Capitalfloat, Indifi etc are making it extremely easy for the SMEs to address their working capital requirement. Unlike traditional lenders like banks and distributors, it’s quick and hassle-free. Most of the companies claim to process credit applications within 3–5 workings days.

2. Impartial credit allotment — Data-driven algorithms for credit approval have made the process faster and impartial. The layman procedure involving paperwork and collateral submission has also been simplified.

3. Competitive interest rates — Fin-tech start-ups like OfBusiness offer unsecured credit line up to 2 crores at lower interest rates. Moreover, SMEs pay interest only on disbursed amount despite having bigger credit lines at disposal and only for period used.

4. Complementary services — In addition to financing, OfBusiness helps the SMEs procure bulk raw-material like steel, polymer, cement etc. from trusted suppliers; to improve service quality and prevent any credit failure.

5. Retaining ownership — Unlike banks, fin-tech start-ups let SMEs retain the ownership of their company by offering collateral free credit line. The transaction outlines every detail of the process with no hidden charges or any pre-payment for registration.

Companies like Power2SME and OfBusiness offer specific customized credit lines to meet urgent working capital requirement and assistance in sourcing bulk raw-material material. This has been extremely helpful for infrastructure and manufacturing companies. Infact, OfBusiness is going to another level by aggregating new business opportunities for SMEs on Bidassist.com. As of date they publish only government tenders for SMEs to access it for free, but they claim that they will be adding private opportunities to the platform in another 3–6 months.

Future for SME’s in India

With so many reforms and policies being released by the Government of India, the future clearly looks bullish for the SMEs. They are only headed upwards to get massive growth for their business and expansion to more regions and territories.

To add to that, Fintech start-ups are further helping SMEs by offering them the collateral-free working capital. SME’s will be seeing an evolution in their own growth journey by stabilizing their costs and hence growing their business steadily and consistently; and with a helping hand from companies like Bidassist.com or tendertiger or any similar tender aggregation platform, they will also get better at bidding for tenders winning them, and hence be able to take a bite of the government tenders pie.

With the Indian economy becoming $5 trillion by the year 2025, SMEs are bound to be the largest contributor to that grown economy; not just with the economic contribution, but also with more jobs, more skills and talent, betterment of entire region and towns, and hence the socio-economic health of our country.

You stand tall, when your backbone is strong and supports you completely; SMEs are the backbone of INDIA!

Originally published at www.ofbusiness.com.