A recent report by the McKinsey Global Institute sheds light on the critical role of micro, small, and medium enterprises (MSMEs) in India's economy. Contrary to other emerging economies where MSMEs contribute 77% to employment, in India, they constitute 62% of the workforce. However, their contribution to the overall business value added is 30%, with only 10% coming from micro-MSMEs, compared to 49% in other emerging economies.

The report highlights that MSMEs in India are 26% as productive as large companies, similar to the productivity levels in other emerging economies. In contrast, in wealthier economies, a transition from microenterprises to larger corporations is observed as they progress up the income ladder. This shift results in increased contributions from large businesses to the national output.

Anu Madgavkar, Partner at McKinsey Global Institute, says the interconnectedness between MSMEs and large enterprises, stating that their interactions can be mutually beneficial. The report suggests that narrowing the productivity gap between MSMEs and large companies could boost India's GDP by approximately 10.5%.

Furthermore, the report identifies high-potential sub-sectors such as computer programming, information services, telecom, manufacturing, and others where fostering networks between MSMEs and large enterprises can be particularly beneficial. It highlights that productivity levels are higher when both small and large companies engage with each other, with MSMEs involved in business-to-business interactions exhibiting a 40% smaller productivity gap compared to those primarily dealing with individual customers.

The report shows the significance of MSMEs in India's economy and advocates for initiatives to enhance their productivity and foster collaboration with larger enterprises, which could lead to substantial economic gains.

The role of MSMEs in Indian employment

MSMEs are integral to India's economic landscape, fostering industrial employment, adding value, and dispersing industries regionally. They account for over 8% of GDP, 45% of manufacturing output, and 40% of exports, showcasing their pivotal role in the economy.

Employment-wise, MSMEs employ over 111 million people, highlighting their significance as primary job creators. Their adaptability and widespread presence, especially in rural areas, ensure inclusive economic development.

Furthermore, MSMEs drive innovation by embracing new technologies, fueling India's economic growth and global competitiveness.

Their impact extends beyond economic metrics, creating diverse job opportunities nationwide. This role is crucial for maintaining regional economic equilibrium and promoting socio-economic empowerment across urban and rural areas.

The pillars of India job market

The McKinsey Report indicates the pivotal role of Micro, Small, and Medium Enterprises (MSMEs) in the Indian job market, shedding light on their substantial contributions to the economy. Globally, MSMEs are crucial economic drivers, representing about half of the world's GDP, with varying shares across different countries. In India, while they contribute less than 40 per cent of the GDP, they are significant employers, constituting around 40 per cent of total employment and a staggering 70 per cent of employment within the business sector, excluding agriculture, government, and finance.

MSMEs play a more substantial role in emerging economies like India, employing four-fifths of all workers compared to two-thirds in advanced economies. Notably, in countries like Kenya, they account for a whopping 96 per cent of employment, highlighting their indispensability.

Furthermore, MSMEs are vital job creators, particularly in advanced economies, where they have contributed over half of the net job growth in businesses. In the United States, SMEs have been responsible for two-thirds of all jobs added in the past quarter-century. Similarly, in emerging economies, MSMEs have generated seven out of ten new formal jobs over the last decade.

Across various sectors, MSMEs play a crucial role in production, with significant contributions observed in accommodation and food services, construction, professional services, and trade. Although their contribution to the manufacturing sector is around 45 per cent, they remain the second-largest contributor to small business value after the trade sector. Overall, MSMEs employ at least half of all business workers across sectors, further underscoring their importance in the Indian job market and economy at large.

MSMEs and India's employment landscape

According to Jacob Roger, a cluster manager, Micro, Small, and Medium Enterprises (MSMEs) form the bedrock of India's economy, fostering innovation, creating jobs, and driving economic growth. They innovate across sectors, from traditional to cutting-edge industries, embodying India's entrepreneurial spirit. Their adaptability enables them to seize emerging opportunities swiftly.

MSMEs are pivotal in generating employment, particularly in rural and semi-urban areas, contributing to poverty reduction and social stability. They also promote economic inclusion, empowering marginalised groups through initiatives like the Prime Minister's Employment Generation Programme. Moreover, MSMEs play a crucial role in India's exports, enhancing the country's global competitiveness.

However, MSMEs face challenges like limited access to finance and technology, as well as regulatory burdens. Addressing these hurdles requires comprehensive reforms and capacity-building efforts. Embracing digital technologies and fostering collaboration can unlock new growth avenues for MSMEs, ensuring their continued empowerment and contribution to India's economic landscape.