In praise of India’s Mittelstand
India’s SMEs could emulate Germany’s Mittelstand, if we get off our obsession with large-cap companies as well as the new-age start-ups looking to be the next unicorn
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In Delhi’s Okhla Industrial Area, Sahil, a former tech executive, now runs a medium-size enterprise, manufacturing parts for air-conditioners. Even though his customers include all the well-known Korean and US manufacturers selling in India, life for the tier-1 B-school graduate is never easy given the limited access to financial resources, lack of infrastructure support and a perennial problem of hiring and managing semi-skilled workers. Yet he perseveres, refusing to take the easy option of chucking it all up and going back to a cushy job. He says there is an excitement to building something of his own from the ground up that neutralizes the pain of being a part of India’s long-neglected small and medium enterprises (SME) sector.
He isn’t the only one. In the hugely indebted steel sector, a Mumbai-based rolling mill is not only debt-free but is also planning to upgrade technology through internal accruals. In Chennai, a 20-year old SME uses collagen technologies to make highly specialized products for use in treating burns and surgical haemostasis while a Jalandhar-based company has been distributing auto spare parts of major manufacturers for over 80 years.
Some common threads run through a number of such units. Most of them are in niche areas, are run by owners who are increasingly qualified and well-educated and they are mostly unlisted companies. These are the unsung heroes of India’s growth over the last two decades, boosting it in good times and providing the anchor in bad times. They constitute India’s Mittelstand, the micro, small and medium enterprises sector, which contributes nearly 8% of the country’s GDP, 45% of its manufacturing and 40% of its exports. More pertinently they also provide the largest share of employment after agriculture.
The numbers though, could be better, much better. In Germany, the Mittelstand, which make up over 90% of all German firms, account for nearly 52% of the country’s GDP. That’s possible in India too provided we get off our obsession with large-cap companies as well as the new-age start-ups looking to be the next unicorn. But for that they will need some help from the government. Which is what Union finance minister Arun Jaitley has tried to do in the latest budget by cutting the corporate tax rate for SMEs with less than Rs50 crore of revenue to 25% from 30% earlier. Jaitley also announced marginal relief in income tax for small businesses with revenue of up to Rs2 crore.
These paltry concessions, hard won as they are, should just about mitigate the gloom that demonetization had plunged them into. Lacking in financial and political clout, they bear the brunt of petty officialdom even as they cope with the vagaries of a constantly changing business environment. What’s worse, realizing payments from large companies who are customers is a tall order. Credit periods are inordinately long and often extended arbitrarily. With only 5% of SMEs having access to bank credit, this severely crimps operations and inhibits necessary expansion.
What keeps them going is their traditional conservatism as well as a degree of commitment to the business not seen in many an e-commerce founder, happy to see his stake, and role, drop to minuscule levels, in quest of private equity. With free cash flow as their business mantra, under-banked and under-served simply because none of the stakeholders lends to them, these men and women know that the price of taking their eyes off the profit and loss statement can be extinction, which is why it is important for them to stay in control.
In all of this, they also hold valuable lessons for today’s new breed of entrepreneurs. Instead of starting off with dreams of hockey stick valuations and floundering in the process, India’s wannabe entrepreneurs would do well to first aim to be well-run small enterprises.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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