Small & Medium Enterprises (SMEs) sector is considered as the spine of India's burgeoning economy and it is the single largest sector to absorb country's fast growing young workforce. Undoubtedly, India's GDP growth was 54% between 2005 and 2012; nevertheless, its job growth was only 3% at 15 million net new jobs. Broad estimates show that prevalent disconnects between the GDP and job growth is likely to worsen further in the next decade, if timely corrective measures are not taken to over this disconnect.
Some experts have argued that given the fact that at an annual growth rate of 7-8% the GDP will roughly double by 2025; nonetheless, the number of workers entering the workforce will increase to 8 million each year i.e. 80 million net new job-seekers by 2025. Given the current job creation rate of 3 million jobs per year, only about 30 million new jobs will get created over the period. This entails a job creation gap of about 50 million jobs in the ensuing decade.
India is destined to possess the largest young workforce by 2020, as it is one of the youngest countries in the world with 65 percent of the population under the age of 35, while the average age of Indians in 2020 will be 29 compared to 37 in China. Bulk of the workforce comes from rural areas where incidence of poverty is still high and a study by McKinsey Global Institute (2014) has estimated that 680 million people do not have access to eight basic household needs, viz. food, energy, housing, drinking water, sanitation, healthcare, education, and social security.
Harnessing Youth Potential
With a view to eradicate poverty, harness country's youth potential and accelerate the pace of economic development, the NDA government led by Prime Minister Narendra Modi has launched several flagship initiatives like Make in India, Startup India, Digital India and Skilling India. A commitment of multi-billion dollars of investment in these initiatives has been made. Foxconn, the world's largest contract manufacturer of mobile phones, has already outlined its multi-billion dollar local manufacturing plan, along with a slew of Indian and global handset makers reportedly having also set up their own plants or in the process of doing so. The start-up momentum in the country is expected to get a significant boost from the Startup India initiative. Sops like tax holiday make it more attractive for investors to fund the India start-ups.
Adequate implementation of these flagship initiatives entails vast potential of generating jobs to absorb young workforce. Concurrently, there is a dire need for skilling and capacity building of the youth, so that the youth could become employable for the new genre of jobs that are expected to get created by hundreds of thousands.
Admittedly, these flagship initiatives are getting positioned at the very core of the country's economy and are designed to play a pivotal role in its future development and growth. One expert has opined that there are complex interdependencies between these initiatives, which also imply that a weakness in any of the new cogs could have a crippling effect on the giant wheels. It would, therefore, be very important for the government to ensure that the execution of all flagship programs is done in a very integrated and highly efficient manner.
The Role of SMEs
The SME sector is critical for the success of these flagship initiatives, especially the Make in India, in view of the fact that a massive number of ancillary units for large manufacturing plants come from this sector itself. In the wake of the possibility of more and more state-of-the-art plants coming up on the back of fresh big-ticket investments, the SME sector is likely to risk facing a technology lag and hence may not be able to keep up with the more sophisticated future supply-chain needs.
It is in this backdrop that some experts have suggested that the present government needs to visualize these issues much in advance and build incentives for SMEs to digitize and transform their enterprises in order to stay relevant going forward. It is further suggested that such a step would also benefit the overall economy as the development of a vibrant supply-chain ecosystem locally would reduce dependencies on imports of semi-finished goods and parts.
In order to spur economic growth through flagship initiatives and absorb growing young workforce, a higher investment rate in the SME sector is called for. This burden for generating the requisite savings would fall more heavily on the government. Simultaneously, there is no doubt at all that SME-led growth would generate far higher employment growth, which would in itself reduce the need to support aggregate demand through fiscal action since the private consumption arising from such incomes will be higher.
Some experts opine that the capital efficiency of the SME sector can be increased significantly with proper policy since much of the measured inefficiency arises from a variety of constraints within which the SME sector has to operate. The most important of these are: (a) the quality of labour that is available to the SME sector (b) the lack of support to entrepreneurship in general, and to innovation and risk-taking in particular, and (c) the operation of the financial sector.
The SMEs are the primary source of employment opportunities for new entrants to the labour force and that is perhaps one of the reasons why India has one of the lowest incidences of youth unemployment because it has one of the highest shares of SMEs in its GDP. Thus, if youth unemployment is a concern for policy, focusing on entrepreneurship is a better strategy than supporting existing corporate enterprises.
It is widely recognized that the SMEs in the manufacturing sector are the spine of the 'Make in India' initiative and it is incumbent on the SME entrepreneurs to warm up for a big role. In countries like China, contribution of SMEs to the country's GDP is 70%, whereas the percentage in India is low.
According to media reports, the 'Make in India' focuses on 180 products that are presently imported from offshore countries, costing the country about two lakh crore rupees on importing foreign products annually. The immediate task before 'Make in India' initiative is to start manufacturing 30 products, which are presently imported from foreign countries, within the first year of the commencement of the initiative.
India's unique demographic dividend in terms of young workforce is undoubtedly going to become the potential power of Indian economy. However, the failure to create enough job opportunities for the youth population in the near future can be instrumental in creating an alarming situation. Thus, in order to cater to the situation, the Government has not only to come up with plans to provide basic amenities, health, and education to the youth of India, but also to pool in enough job prospects to cater to approximate 15 million youth who join the Indian workforce every year.
According to one opinion, the current employment stature of India acutely points to two measures that need to be, and must be, taken in order to combat the stress. First one being the creation of more opportunities for the job-seeking population and the second major step is to make the workforce more skillful, more educated and more qualified for jobs to be introduced and already present. The SMEs in India have been working diligently, contributing not only to the national GDP but also in creating substantial job opportunities. They provide jobs both in the organized and unorganized sectors, thus covering a larger section of unemployed population.
The Way Ahead
The SME sector has come to play the most significant role in India's economy in terms of spurring economic growth and the largest provider of jobs. This calls for the need to work on schemes and policies that not only promote the growth of SMEs in a big way but also encourage entrepreneurship in India. Thus, it becomes the prime responsibility of the government and the policy makers to provide an encouraging atmosphere where SMEs and especially the startup can bloom. Government must create supportive, rather than restrictive, policies for the betterment of the SME sector in India.
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