The past couple weeks have seen plenty of heat and dust raised about special economic zones (SEZs) in India. While opponents have raised the spectre of large-scale displacement of agriculture and even potential food security threats, proponents have convincingly argued the case for creating large-scale infrastructure and global-scale industry.
But one significant contributor to the India growth story has gone virtually unnoticed. I am talking about India’s much maligned small and medium enterprise sector, which has been receiving far less attention than it deserves, both from the government and the financial sector.
Let’s dispel some popular myths first. The first, of course, is that most SMEs are non-competitive and are high-risk customers for funding. Figures for India are a little hard to come by, since data is scattered across many agencies and collection points. But a study carried out by ICICI Bank found that less than 10 per cent of Indian SMEs, on an average, could justifiably be classified as ‘bad’ assets. What’s more, the ICICI Bank study also validated for the Indian market, the figures for the SME segment in the US market, where small enterprise deliver an average return on capital employed of 35 per cent. No banker is going to call that kind of number ‘risky’.
The other myth is that SMEs are too small in size and far too scattered to grow and compete, both nationally annd internationally. Wrong again. Worldwide – and especially in India – SMEs tend to grow much faster than large industry.
Despite innumerable obstacles in their path, from lack of power to poor access to funding to enormous logistics issues, SMEs, forced by policy into poor infrastructure areas in the guise of ‘backward area development’, SMEs still account for a staggering 90 per cent of industrial establishment and close to 40 per cent of output.
A new study, released by global package delivery leader UPS, only reinforces the importance of SMEs to India’s growth. In fact, the UPS study – conducted globally – specifically identifies India as the future SME leader of the world. The current top spot is occupied, unsurprisingly, by China, whose SMEs have been rated as the most competitive in the world.
But for me, the really interesting findings were that a majority of Indian respondents felt (justifiably) that our policy environment favours multinationals and large business. Yet, an astonishing 81 per cent of respondents felt that India’s growth prospects for the coming year were better than last year (2006).
These respondents are not economists or financial analysts. They are small businessmen, manufacturing everything from automobile components to zip fasteners. Their belief in the India growth story is based on their personal experience and on their confidence in their own ability to deliver.
This is something that our policymakers and bankers need to take serious note of. A more detailed study of China’s SME success story is also warranted. China, clearly, appears to have cracked the code for simultaneously developing both small and tiny industries and mega manufacturing units. China’s SEZ success story is well documented. It’s SME story is not.
There are valuable lessons for India here. The biggest, of course, had been pointed out long ago by one Mohandas Karamchand Gandhi, but forgotten somewhere along the way – that in order to be big, we have to learn to think small.