MSMEs are a major contributor to the Indian economy, accounting for around 30% of Gross Domestic Product (GDP) and providing employment to over 110 million people (ministry of MSME, Annual Report 20–21). However, a more sombre story emerges when examining details. The Indian MSME sector is unique in its long fat tail of relatively unproductive micro enterprises, which are unregistered or informal, new-to-formal-credit, and characterised by low growth and employment per unit. Most of the micro enterprises are sole proprietorships with less than five employees. Furthermore, informal micro enterprises are responsible for 80% of employment while contributing only 20% of output. This highlights the composition of India’s current business landscape of tiny self-employed informal enterprises with low quality human capital. Conversely, there is a severe deficit of formal, productive, and job-creating small and medium enterprises. Furthermore, while the MSME segment is perceived as a significant job creator, the quality and conditions of the jobs created are often precarious and in the form of casual labour, daily labour and self-employment, often with very little or no job security. For most micro enterprises, the entire focus is on making sure the business stays afloat, and not on growing the business. This business stagnation hampers many crucial aspects for an enterprise to grow and achieve scale, such as efficiency, innovation and production quality. While the magnitude of these problems is well known, little progress has been made to address them efficiently given the complexity and interconnectedness. In effect, three critical ingredients needed for any early stage business to thrive, namely access to markets, skills and working capital, are sorely missing for most enterprises. On the other hand, significant public investment would be required to address these gaps and create effective market linkages, skills and mentorship, and access to finance. When considering the existing resource constraint conditions, the critical questions then become:

(1) How do we identify high growth and potential enterprises and ensure that they are prioritised?

(2) What are the critical life stages of these businesses and when do they most need support to harness their future potential?

(3) What infrastructure and tools are required to track and identify promising firms early enough in their lifecycle for them to grow?

Emerging digital data and technologies such as fintechs, e-commerce and enterprise resource planning give us a unique and unprecedented opportunity to address the questions above with reasonable efficiency and effectiveness.

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This article is authored by Sharon Buteau, executive director, LEAD, Krea University.