India boasts of an astonishing 65 million enterprises, yet less than one per cent ‘scale’ from micro to small, and an almost invisible 5,000 qualify as medium-sized. These numbers expose a stark reality ‒ while the country teems with micro ventures, true business growth is painfully rare.
The micro, small, and medium enterprises (MSMEs) sector, a crucial pillar of India's economy, faces challenges due to its broad classification under a single category. This oversimplification stifles MSME growth and curtails their broader economic impact. By failing to account for the sector's diversity and complexity, it undermines the effectiveness of targeted policies and support measures. This misalignment weakens the very support systems needed to nurture these enterprises, hindering their development and long-term sustainability.
Micro and small enterprises (MSEs) face difficulties in securing adequate funding due to perceived high risks, limited market reach, and the financial and expertise barriers to adopting new technologies. Additionally, navigating complex regulations imposes significant burdens that stifle growth. To address these issues, a tailored policy approach is essential ‒ one that offers customised financial instruments, initiatives to expand market access, affordable technology adoption, and streamlined regulatory compliance. This can foster an environment in which they can flourish and make a more significant impact on the economy.
*Straddling Growth Between Small Business and Big Corporations
Medium enterprises (MEs) occupy a critical space in the MSME spectrum, acting as a bridge between small businesses and large corporations. With greater financial stability, scalability, and a capacity for innovation, MEs contribute significantly to economic development. However, the blanket policies governing the MSME sector often fail to address the specific challenges and opportunities unique to MEs.
One of the major challenges MEs face is competition. They often find themselves squeezed between larger companies with extensive resources and smaller businesses with lower overhead costs. As a result, maintaining profitability and market share becomes a continuous battle. Although MEs generally have better credit histories than smaller firms, securing funding for growth and expansion remains difficult. Lenders may see them as too large for small business programmes, yet too small to justify larger loans, leaving them in a financial gray area.
Attracting and retaining talent is another critical issue. As MEs grow, skilled employees become essential to their operations. However, they often struggle to compete with the compensation packages offered by larger corporations. In addition, MEs must navigate complex regulatory requirements, which, although less burdensome than for large companies, are still costly and time-consuming.
Beyond these challenges, MEs face market volatility, technological disruptions, supply chain issues, and succession planning difficulties, especially in family-owned businesses. International expansion ‒ an aspiration for many MEs ‒ is often hindered by cultural differences, language barriers, and foreign regulatory complexities.
Moreover, raising capital and securing fair valuations when listing on stock exchanges presents significant hurdles. The lack of tailored support for MEs in financial markets adds to these challenges, making it difficult for them to secure the funding and recognition they deserve. Addressing these specific needs is crucial for the sustained growth of medium enterprises.
*Breaking the Mold: Why MSMEs Need Tailored Policies
India’s one-size-fits-all approach to MSME policies is hindering growth and innovation. By failing to recognize the diverse needs of MSMEs, uniform measures for credit access and technology adoption for example overlook their unique capabilities. This approach stifles the potential of these crucial economic drivers, preventing them from reaching their full potential.
Data shows that medium enterprises employ more workers and have a higher capacity for labour absorption than smaller businesses. Tailored policies ‒ such as flexible labour laws and customised benefits ‒ could significantly boost their growth. Medium enterprises also play a key role in supply chains, often acting as suppliers to large corporations. Despite this, supply chain policies rarely address their specific needs, undermining competitiveness.
Moreover, MEs invest more in research and development (R&D), driving innovation and technological advancement. Yet, government initiatives frequently ignore the different capabilities of MEs, leading to ineffective policy outcomes. A more differentiated approach that supports MEs in fostering innovation and supply chain integration is crucial for maintaining their competitiveness both domestically and globally.
*Learning from Global Best Practices
Many developed economies recognise the importance of distinguishing between different sizes of enterprises. For example, both the United States and the European Union have established specific criteria for defining micro, small, and medium-sized enterprises, allowing for tailored policies and support programmes. In the US, the Small Business Administration (SBA) uses industry-specific size standards, considering factors like revenue and employee count. Similarly, the European Union categorises enterprises by turnover and headcount. These differentiated classifications enable more precise policy interventions, ensuring that smaller enterprises receive the targeted support they need while larger enterprises access resources suited to their scale and complexity.
*A Call for Nuanced Policy Interventions
India's current classification of MSMEs blurs the crucial differences between micro, small, and medium-sized enterprises, resulting in a one-size-fits-all policy approach that often hinders rather than helps.
Policymakers need to appreciate a more nuanced understanding of these distinctions and implementing targeted policies, that can unlock the true potential of each segment. Embracing a tailored policy approach would not only address the specific needs of each MSME segment but also ignite a wave of growth and innovation, setting India on a path to becoming a more agile and competitive force in the global economy.
