The role of SMEs in the growth of the Indian economy

The SME sector, according to this FICCI report, has been creating roughly 11.10 crore jobs across the country (National Sample Survey 2015-16). This sector is rightly known as India’s “engine of growth” and consequently, taking an SME loan or availing SME funding has become easier over the years. Despite a glaring lack of infrastructure and various government policies of the past that discouraged people from starting their own businesses, the country has witnessed a remarkable growth in this sector. SMEs contribute 8% of the GDP. By 2020, this figure is expected to reach 22%. Various small business loans schemes are giving further boost to this segment.


40% of the total export from India originates from small and medium-sized businesses. 45% of the total manufacturing output comes from this sector. Small and medium-sized businesses have been a deciding factor in reducing unemployment, eliminating poverty and blurring income inequalities. SMEs can be started with minimal capital investment. SME finance and SME business financing are easily available to small enterprises.

The Micro, Small and Medium Enterprises Development Act explained

The original version of this Act was enacted in 2006 to facilitate the promotion and development of micro, small and medium enterprises and encourage them to compete with each other on an equal ground. Small business loans can be easily availed through the provisions of this Act.


There has been an effort to amend the Act and the amendment was introduced as the MSME Development (Amendment) Bill, 2018, but it was opposed by various political parties and a few business bodies and consequently, it is in limbo. The current amendment aims to define small and medium-sized businesses according to their annual turnover. For example, a turnover of ₹ 5 crore makes you a “micro-enterprise”.  ₹ 5-75 crore puts you in the “small enterprise” bracket, and to become a “medium enterprise” if your annual turnover is ₹ 75-250. Can your annual turnover have an impact on the amount of business loan you can get? Explore further topics on this website.


Different slabs are noted for different categories such as manufacturing, export and services industry and different small business loans are available for different slabs.


Through the act, the government has introduced multiple schemes, secured and unsecured business loans, SME loans, subsidies and incentives. This Act encourages small and medium enterprises to register themselves as such to avail various facilities provided by it. Although it is not mandatory that you register, if you register, you can avail the following benefits through the Act:

  • Easy sanction of bank loans and small business loans
  • Lower interest rates for SME loans and business funding
  • Exemptions in excise duty
  • Exemptions under Direct Tax Laws
  • Priority in specialized industrial estates
  • Various tax subsidies
  • Power tariff subsidies
  • Capital investment subsidies


Digital economy and SMEs

It is estimated that there are 42.5 million SMEs in India right now (source: Economic Times) and among these, 43% use various Internet platforms to sell and promote themselves. With the help of online retail stores, SMEs operating even in the remotest corners of the country can reach a national market. This is also possible because various options for working capital loan are available in different parts of the country.


According to a Google-KPMG report, SMEs that use digital technology in their day-to-day operations and for selling, grow twice in comparison to their off-line counterparts. A big reason is that broadband rates are one of the cheapest in the world and Internet connectivity has reached almost every corner of the country. You can see even roadside vendors talking on their mobile phones and watching YouTube videos.


By 2020, 730 million people in India will be using the Internet and by 2022, there will be 700 million smartphone users in the country. This presents a very big opportunity to the SMEs to directly reach their customers without middlemen and even without online retail stores in many instances. SMEs can sell products and services even using instant messaging apps like Facebook Messenger. With little direction and consulting, or through finding a business partner, they can get easy business loans and SME funding.


Digital portals like Government E-Marketplace are further empowering SMEs to reach economies of scale right from where they are. They can easily land big government projects by listing their products and services on the portal. Previously, this facility was available only to significantly bigger businesses.


How various SMEs help the Indian economy grow

There was a time when a big part of job growth came from the public sector. In fact, even these days, when opposition political parties blame the government for not generating enough jobs, they are mostly using data from public sector companies.


The greatest advantage of promoting small-scale industries and small businesses is that they provide employment without much government interference. SMEs encourage both urban and rural growth. Broadly, the SMEs help the Indian economy in the following ways:

  • Generate employment
  • Reduce poverty rate
  • Reduce urban-rural income gap
  • Curtail migration
  • Encourage regional development
  • Boost exports
  • Bring down pollution levels
  • Increase production
  • Increase people’s purchasing power
  • Improve quality of life in general

Often, it is not logistically possible for big businesses and industries to establish themselves in rural areas and even when they are able to do so, they confine themselves to various industrial and commercial zones.


SMEs are not constrained by these limitations. Due to low investment requirements, easier availability of small business loans, and sometimes even lower expertise, small businesses can be operated even in villages and small towns, improving people’s standard of living in the process.

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john mayer 11 Months Ago

Thanks for sharing such an informational blog which will, surely be a big help to the people who have small medium business

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