MSMEs contribute 62% to employment in India: McKinsey Global Institute

MSMEs in India are only 26 per cent as productive as large companies, in other emerging economies it is 29 per cent

The micro, small, and medium enterprises (MSMEs) in India contribute 62 per cent to employment, as opposed to 77 per cent in other emerging economies, according to a report released by the McKinsey Global Institute (MGI) on Thursday.

The report says that MSMEs in India contribute 30 per cent to the overall business value added (Rs 40 per cent in manufacturing, professional services, and ICT), as opposed to 49 per cent in emerging economies.

“The majority of MSME employment in India is within micro-MSMEs, which have only contributed around 10 per cent to the top cap companies over time, in contrast to approximately one in five in other sample countries,” the report notes.

The MGI report also indicates that MSMEs in India are only 26 per cent as productive as large companies, a figure comparable to emerging economies at 29 per cent.

“In wealthier economies, the employment dynamic differs. A significant portion of employment has transitioned from microenterprises to small and medium-sized enterprises or even larger corporations. In these advanced economies, as they progress up the income ladder, more MSMEs tend to scale up into larger enterprises, get acquired, merge with them, or exit via creative destruction. Consequently, the contribution of large businesses to the national output of the wealthiest economies increases relative to that of small firms,” the report explains.

“No MSME operates in isolation. Its prospects are influenced by its interactions with other enterprises, and these interactions can be mutually beneficial: a win-win situation for both small and large businesses,” says Anu Madgavkar, Partner at McKinsey Global Institute and author of the report.

The report also emphasizes that narrowing the productivity gap could contribute to approximately 10.5 per cent of India’s GDP, primarily from subsectors such as computer programming & information services, telecom, broadcasting, accounting, architecture & engineering, manufacturing of basic metals, chemicals, electrical and electronics, auto, and components.

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“Some of these high-potential sub-sectors are in areas where India’s large companies are highly productive, and fostering networks between MSMEs and large enterprises can be beneficial,” the report added.

The report points out that the productivity of both small and large companies tends to be higher when they engage with each other.

“In two-thirds of global subsectors, the productivity of MSMEs and large companies are closely linked. MSMEs engaged in business-to-business interactions, often with larger entities, exhibit a 40 per cent smaller productivity gap compared to those primarily dealing with individual customers (business-to-customer),” said the report.

 
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