Small and Medium Enterprises (SMEs) are the backbone of the Indian economy. There are large companies in the cities. They hire educated people and make huge profits. The SMEs are located in towns and villages, employing skilled and semi-skilled workforce. SMEs are the solution for several problems India faces as a developing nation. They are easy to set up SMEs. Hence, there are many units flourishing in all corners of the country. Let us look at the role SMEs play in India’s economic development.
There are around 3.6 crore SMEs in India. These units hire a population of about eight crore, i.e., 40% of India’s workforce. The employment intensity of SMEs is four times more than that of large companies. SMEs contribute 8% to India’s GDP. Also, 45% of total manufacturing output and 40% of India’s exports come from SMEs. Among SMEs, 31.7% produce 6000 types of products. The remaining 68.2% are service providers. This sector has been growing at a steady rate of 10%.
Contribution of SMEs
SMEs help to address unemployment in the country. They also play an important role in maintaining regional balance. Around 20% of SMEs are in rural areas where the majority of India lives. This is a major driving force in the development of villages. Big companies have played a remarkable role. But, not all have been able to reach the grassroots. The cost of investment for SMEs is low. So, budding entrepreneurs can start SMEs with ease. They can also give jobs to local people. About 54.77% of enterprises are in cities and urban areas; while 45.23% enterprises are in rural areas.
Clusters for sustainable growth
Clusters are defined as a collaboration of interconnected companies and associated institutions by United Nations Industrial Development Organization. These individual units produce the same or related products. They are also located near each other. Such associations help SMEs. Advantages include economies of scale, cluster-oriented financial aid, and support from business associations. This has allowed SMEs to grow at a significant rate. For example, the Panipat cluster produces 75% of blankets in India. The Tirpur cluster produces 80% of cotton hosiery exports.
Challenges faced by SMEs
It is important to ensure that SMEs remain healthy. They need a practical environment to grow and flourish. Lucrative and suitable policy implementation by the government also plays a major role. A major hurdle faced by SMEs is easy and timely access to finance. The SME Rating Agency of India Limited (SMERA) was set up to enable smooth credit. SMEs rated by SMERA can get loans with ease. But, SMERA is a catalyst. The main issue is the lack of finance. Allocating significant funds for SMEs is an urgent need.
Most SMEs are technologically-challenged. This is due to lack of knowledge and resources. But they are now open to adopting new technology. A study reported that over 60% SMEs think technology can be a differentiating factor. The efficient use of technology can ease the production process. It can enable innovation and systematic business processes. It can also help maintain customer relationships.
Low entry barriers lead to severe competition in the SME sector. But there are immense opportunities to explore. The Internet has erased international borders for doing business. It symbolises the impact and growing role of SMEs in India’s economic development.