SMEs employ close to 40% of India's workforce, but contribute only 17% to GDP

Small and medium enterprises (SMEs) have been the backbone of the Indian economy. That is both a good and a bad thing.

The good part first. Employing close to 40% of India's workforce and contributing 45% to India's manufacturing output, SMEs play a critical role in generating millions of jobs, especially at the low-skill level. The country's 1.3 million SMEs account for 40% of India's total exports.

The bad thing is that SMEs in India, due to their low scale and poor adoption of technology, have very poor productivity.

Although they employ 40% of India's workforce, they only contribute 17% to the Indian GDP. Why? Too many firms stay small, unregistered and un-incorporated in the unorganised sector so that they can avoid taxes and regulations. "The firms have little incentive to invest in upgrading skills of largely temporary workers or in investing in capital equipment," says the latest Economic Survey.

The scenario is improving, albeit slowly, says Praveen Bhadada, director (market expansion), Zinnov, a technology consultancy firm. "Sickness in the SME sector was a big issue. Over the past 10 years, with some policy initiatives and government measures, the mortality rate has been going down," he says.

Financing is the biggest challenge and the lack of it is the main reason for an SME going out of business. "We see some of these SMEs exploring use of technology solutions to become efficient," adds Bhadada.

At 48 million, India has the second largest number of SMEs in the world. China leads with 50 million.