Small and medium enterprises (SMEs) play a significant role in the Indian economy. They contribute at least 35% to exports, at least 40% to industrial production, at least 12% of the gross domestic product (GDP) and provide employment to about 60 million skilled and unskilled workers across more than 26 million enterprises. The SME sector is likely to generate one million jobs every year and will play a crucial role in garnering demographic dividends. The real unsung heroes of India Inc are the millions of mom and pop enterprises, which are silently making goods and providing services at competitive rates, creating additional jobs for millions of skilled and unskilled workers and facing the challenges of globalisation. The SME sector has demonstrated true Indian entrepreneurship and some of the biggest names in India Inc have their roots in the sector.

The SME sector today is facing a set of challenges which it has not experienced in the past and which could impact its future growth and in turn affect the Indian economy.

Complacency setting in

Shyamal Banerjee/Mint

This unexpected rise in wealth has dampened SME entrepreneurs’ hunger for growth. The challenges of taking business to the next level in terms of investment, manpower and professionalising the organisation, among others, are too much of a risk to take for the satisfied entrepreneur. Some SMEs are being run in neutral gear rather than in top gear.

Disinterest in second generation

Many second-generation SME entrepreneurs don’t want to step into their parents’ shoes. Some of them are settled abroad. Some of them are educated enough to pursue well-paying jobs. Some of them do not want to run the factory or business as the efforts of running the business are not rewarded through adequate profitability. For example, grocery stores in Mumbai are finding it difficult to get their next generation in the same business. Some of them don’t have the entrepreneurial zeal of their parents to work at the non-air-conditioned shop floor level. In absence of the next generation’s commitment, further investment to take the SME business to the next level is not being done. Neutral gear versus top gear comes into play due to the non-commitment of the next generation.

Absence of joint family support

Break down in the joint family system is limiting, to some extent, SME entrepreneurs’ ability to start a new business. In absence of support from a joint family system, an entrepreneur has to do multiple roles resulting into long gestation period or higher cost, eventually leading to higher mortality. The vacuum left by joint family system is not filled completely by friends as the emotional bonding of friendship sometimes doesn’t stand the test of commercial considerations. Absence of ecosystem to nurture and support at different stages of growth of a SME is a growing concern.

Other constraints

The SME sector is facing continuous demand on productivity and efficiency gains from their large counterparts. These demands require investments in business on a regular basis. Reward for making such investment is not proportionate to the capital and efforts that are put in. This, in turn, is affecting investments by SMEs

Upcoming entrepreneurs are constrained by the high cost of setting up business, availability of finance and increasing complexity of doing business. Technology start-ups are obviously an exception to this due to the low capital requirement. SME exchange is a good beginning to provide equity to this sector.

Encashment of SME business value has not yet picked up as the merger and acquisition opportunities are limited due to emotional attachment to the business (till it is too late to detach) and the difference in the perception of value.

The SME segment is quiet dynamic in nature and has withstood many adversities in the past to reach where it is today. A vibrant merger and acquisition market in the SME sector along with availability of venture/angle investment providing equity will lead to further development of the SME sector and help overcome some of the challenges on the entrepreneurial side.

Nilesh Shah is director, Axis Direct.

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