Small and medium enterprises (SMEs) have been the backbone of the Indian economy. Employing close to 40% of India’s workforce and contributing 45% to India’s manufacturing output, SMEs play a critical role in generating millions of jobs, especially at the low-skill level. The country’s 1.3 million SMEs account for 40% of India’s total exports

It needs to be shared with the readers that due to their low scale and poor adoption of technology SMEs have very poor productivity.

Although they employ 40% of India’s workforce, they only contribute 17% to the Indian GDP. Too many firms stay small, unregistered and un-incorporated in the unorganised sector so that they can avoid taxes and regulations. The firms have little incentive to invest in upgrading skills of largely temporary workers or to enhance investment in capital equipment.

Financing is the biggest challenge and the lack of it is the main reason for an SME going out of business. Over the past 10 years, with some policy initiatives and government measures, the mortality rate has been going down. At 48 million, India has the second largest number of SMEs in the world; China leads with 50 million.

High street banks as well as boutique finance firms are exploring opportunity in this space. For instance the private bank, IndusInd has recently launched a separate wing to look into investment banking possibilities in the SME segment. Besides, there are boutique players like Keynote with a focus on small cap firms. Others like Edelweiss Capital, Yes Bank and Ernst & Young are getting active in the segment

For a change, the investment banker is having a drink with the small businessman. Usually driven by hints of big ticket deals, several i-bankers today are sensing opportunity in small and medium enterprises.

The momentum of off-shoring in the IT industry will increasingly become more globalised with newer locations and also see increased participation of small and medium enterprises (SMEs) in the years to come.

Rakesh Dayani