Capital allocation that reaches deserving MSMEs will result in inclusive growth
The numbers represent both an opportunity and a challenge: India has 63 million micro, small and medium enterprises (MSMEs), contributing almost a third of the country’s GDP and half of its exports, with an equal spread between rural and urban areas, that are mostly short of credit. Given the tailwinds behind India’s economy, the MSME sector will keep growing in size, especially as it is formalized. However, for the sector to reach its true potential, qualitative growth is important.
“I got 99 problems and money ain’t the only one"—these adapted lyrics from rapper Jay Z’s monster hit 99 Problems could well be the collective refrain of MSME entrepreneurs in India. Deficient funding reach and credit appetite aren’t the only obstacles in the growth path of small businesses. That’s why, along with the question of how to lend to MSMEs, we should also be asking: How to make MSMEs more credit worthy? It’s useful to view MSME growth prospects through three lenses, as follows: Customer base expansion: India’s economic rise is pegged to the promise of increased demand.
In November 2022, a salary trends report by ECA International predicted that real wages would rise in India by 4.6%, more than Vietnam’s 4% and China’s 3.8%. In September 2023, BMI forecast that India would become the world’s third-largest consumer market by 2027, on the back of a 29% increase in real household spending. The question for MSMEs is how they will find these consumers, both on the wholesale and retail sides.
A 34-year-old entrepreneur from Surat recently spoke to us about this challenge. His firm makes PET preforms, his primary clients are mineral water and soft drink producers. He has a high-quality product at a competitive price but still has trouble
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