Factors That Affect The Growth Of An SMEs In India

SMEs today are not only the building blocks of an economy, but are also the drivers of economic growth and job creation in developed and developing economies across the globe. Rightly regarded as the backbone of an economy, SMEs directly impact the financial health of a country by way of – GDP numbers, poverty level, and per capita income.

Indian Context

Employing around 40 percent of India’s workforce (80 million), SMEs in India single-handedly provide an opportunity for livelihood and employment to a majority of Indians. Even though they employ 40 percent of India’s workforce, they contribute only about 17 percent of India’s GDP. Productivity continues to be a cause of concern for a majority of SMEs.

Some of the factors that currently affect the growth of SMEs in India are:

  1. Business Structure and Management Perspective

Adopting appropriate management systems is necessary to realize sustainable growth for any SME. Organizational structure within an SME needs to be conducive enough to implement strategy that can have a deep impact. Adopting a decentralized approach in a way that it depreciates sole ownership also plays a key role in the overall growth of an SME.

  1. Financing Opportunities

Financing continues to be the single most important factor that ensures the survival of SMEs across the globe. Business loans or business funding is still a marquee factor that decides the growth volume and growth patterns of an SME. To fully realize its growth potential, an SME needs to have an adequate financial backing to support its development process. Access to external financing through business loans or business funding is extremely important, and also a major constraint towards sustainable growth in the future. High interest rates from various banking institutions have forced SMEs to lower their exposure to bank credit. Therefore developing effective lines of credit and innovative financing solutions to help SMEs gain the much needed credit to ramp up their growth is vital.

  1. Motivated Workforce

Growth is a direct function of investment in human capital. The success and viability of an organization and SMEs in India in particular largely depends on the motivation of their workforce. A happy and motivated workforce is critical to the overall business success, particularly for SMEs that are not gifted with a large workforce, unlike their larger counterparts. Education and training play a very important role in the absorption of quality human capital within the organization.

  1. Role of Technology

SMEs in India have been accused of living in a technology bubble. Their willingness to adopt the latest technology trends has often been questioned. Slowly but surely, SMEs are waking up to the fact that adoption of the latest technology can positively impact a culture of innovation within the organization. It can be a key differentiator, propelling them to steady growth and steady returns in future. Adoption of Big Data, MobiTech and Cloud Computing to name a few, are some of the biggest drivers of change that can significantly impact the course of their journey.

  1. Role of Government

The role of the government in promoting SMEs cannot be understated. Policy initiatives taken by the government to boost the GDP share of SMEs can go a long way. Financial backing for the MSME sector can provide further impetus to the SMEs to wilfully compete in the market. Setting up performance and credit rating systems for SMEs can help them entice external finance, helping them achieve economies of scale in the future. Financial assistance to participate internationally can help SMEs collaborate and ink profitable joint ventures.

SMEs today are much better off than their predecessors that had minimum access to technology and minimal exposure to innovative financial products. Mobile and internet penetration has significantly impacted and improved the life cycle of SMEs today. With an environment ripe with opportunities, it is up to the SMEs – how best they make use of it.