How Important Are Small Businesses To India’s Overall Economic Growth?

In any formal economy, small businesses and start-ups take the lead in creating employment opportunities. Their market reach is far and wide expanding into the hinterlands where big corporations have literally no access. Small businesses produce goods locally and find consumers in the vicinity to keep the economy bustling with life. This is true of even the top economies around the world. Small businesses in the United States, the world’s largest economy, employ nearly 59 million people according to a report published by The Pioneer in 2018. The largest employer, therefore in the U.S., is the small business sector. Another report published in 2019 by the Office of Advocacy under the U.S. Small Business Administration, pegged the small business activities at 44 percent of all economic activities in the States.

A giant share of small businesses in an economy subtly unravels the people’s propensity towards enterprise. The inclination towards starting businesses is predominant among Indians. A survey by a leading recruitment agency, Ranstad Workmonitor, revealed this proclivity among Indians to own a business. As much as 83% of the respondents in India expressed their desire of becoming an entrepreneur as compared to 53% globally. Clearly, it shows what small businesses mean to the Indian economy.

The Small Business Architecture in India

Indian economy, for many years since independence, has been considered an agriculture-led economy whereby most of the economic activities happen around agriculture. This perception, however, changed progressively over the years especially in the post-economic liberalisation phase starting in the early 1990s. The then government’s decision to liberalise the economy paved the way for small businesses in the years to come. Many individuals set forth towards the journey of creating their own businesses. Several firms sprang up in different pockets of the country that enabled self-reliance, reducing the dependency on imports of goods and commodities from the overseas market. This is exactly what ‘Atma Nirbhar Bharat’ means now: becoming self-reliant and self-sufficient.

India’s small businesses come under the institutional architecture of MSME (Micro, Small and Medium Enterprises).  When we talk about small businesses we cannot choose to ignore MSME. Ministry of Micro, Small and Medium Enterprises was created in the year 2007 after merging the erstwhile Ministry of Small Scale Industries and Ministry of Agro and Rural Industries. To scale up their businesses, the ministry assists MSMEs in various ways – right from the policy planning, programmes development and conceptualization of schemes to their implementation.

While assessing the impact and contribution of MSMEs one should clearly understand the differentiation between micro, small and medium enterprises. The ministry classifies these segments according to their capital expenditure and annual turnover. Accordingly, the ministry defines:

· Micro enterprises as an enterprise with an investment of less than 1 crore and an annual turnover of less than 5 crores;

· Small enterprises as an enterprise with an investment of less than 10 crores and an annual turnover of less than 50 crores;

· Medium Enterprises as an enterprise with an investment of less than 50 crores and an annual turnover of less than 250 crores.

Small businesses fall in between the micro and medium enterprises criteria.

MSME: India’s Economic Growth Driver

Over the last five decades, the MSME sector has emerged as a highly dynamic sector of the Indian economy and plays a crucial role in keeping the economy running. Because of its share in employment and revenue generation, it is considered as the economic growth driver, the engine that keeps the train of prosperity chugging ahead. Nearly everyone is greatly dependent on the MSMEs for some needs or the other. MSME contributes 30% to the gross domestic product (GDP) and nearly 40% to the overall exports. The sector employs about 110 million people in different parts of the country.

The MSME sector is the leading force of Industrialization in the rural sector. The sector operates hand in glove with the rural economy with more than 50% of the MSMEs functioning in rural India. According to NITI Aayog Chairman, Amitabh Kant, if India has to reach the landmark of $5-trillion economy, MSMEs have a great role to play. As per Kant: “The sector contributes in a significant way to the growth of the Indian economy — with a vast network of about 6.3 crore units producing more than 8,000 products and a share of around 30% in nominal GDP.”

It is clearly an institutional acknowledgement of the vitality of small and medium businesses in boosting India’s economic growth not only in the contemporary times but in the years to come.

Small Businesses, Big Advantages

Now the question is why does the government put a premium on small businesses? There are various factors that highlight the importance of small businesses to the Indian economy. One of the important factors is providing a hedge against global economic meltdown. In the 2010s decade, the world has seen a contraction of the global economy triggered by the financial crisis in the U.S. which led to a drop in the U.S. gross domestic product by 4.3%. This period, starting from 2007 to 2009, is called the ‘Great Recession’ which was the deepest economic recession since World War II. During this period national economies around the world experienced a general decline. However, the effects of the global economic recession were not felt much in India because of a strong and bustling small businesses sector.

Small businesses create competition in the market. How competition is driven in a market? In business parlance, competition is the antithesis of monopoly. Competition creates buying options for the consumers while monopoly leaves consumers with no or very little choice. For instance, a local shoe maker will make available range of shoes at relatively low prices than big brands. Thus, it offers choices to consumers instead of compelling them to buy from the available branded pair of shoes. This situation ultimately prompts the brand owners to decrease their prices or nullify their arbitrariness in marking product prices. Even if the consumer eventually decides to buy branded shoes he/she will get the benefits of competition in the market. Thus, small businesses reduce dependency on external businesses for meeting daily consumer needs.

At the local level, small businesses create job opportunities for the people. Big companies establish their businesses with a workforce already in place. They only employ some local people on need basis, particularly for security and proper upkeep of the company’s premises. On the flip side, local businesses hire specialists from the local area only. The bottom-line is small businesses create job opportunities for the local population and solve some part of the unemployment problem.

Small businesses also enhance the psychological well-being of individuals. Those working for big firms remain perpetually under performance strain. They need to contribute and perform high in order to remain a relevant asset for the company, or else they always run the risk of being termed as a ‘non-performing asset’. The employees live under the burden of performing high or perishing. Starting their own enterprise gives them the sense of ownership and a good work-life balance. They can give more time to family and feel more psychologically confident in doing their work. It brings a great transformation in their mental setup and makes them functionally smarter and efficient. Therefore, establishment of new businesses means creation of diversity in the business landscape. Diversity augurs well for a country’s economy. If it remains dependent on a fixed economic structure it is highly likely that it will fail to withstand the market turbulence.

Conclusion

Studies from across the world conjure up the qualitative relevance of small businesses to the running of the national economies. Like the U.S., China also relies big on its SMEs. Figures suggest that the number of SMEs to be over 38 million in 2019. In China, SMEs get a 10% year-over-year growth which means the number of SMEs increases by nearly 10% every year. India is no different from these big global economies. India too relies heavily on the small businesses for its economy to grow year-on-year. This has been amply evidenced by the available data about the importance of small businesses. Small businesses create products, plug the demand gap, reduce dependence on import of products, create job opportunities for the local population, ensure that markets remain supplied with essential goods and services, and keeping the economic activities happening. Even in instances of economic meltdowns or market upsets around the globe, local enterprises remain functional.

Small businesses are indeed very important for the Indian economy. They are a hedge against possible economic meltdowns across the world. Government stands and commissions policy recommendations have clearly vindicated the role of small enterprises in running the economy. This is where the majority of the population is employed. And this is from where the majority of the Indian population is making a dignified living.