As India leads the G20’s activities for 2023 progress with India as the president, a key question looms large: will India be able to capitalise this opportunity with a clear vision, especially in terms of employment generation and long-term growth?

In the past, despite good intentions of the state machinery, India witnessed a prolonged period of jobless growth. The 2020-2050 period is being widely touted as the ‘golden era’ of Indian economy. During this 30-year period, the working age population will bulge, which could then serve as a significant horizontal enabler of growth. But, if that doesn’t happen, the same demographic dividend may become a liability. The choice and options are very clear.

The jobless growth that India has experienced in the past was perhaps a learning for policymakers. They have been biased towards certain big sectors. Now, the time has come to think differently, both in principle and practice. They presumed that the Indian youth will move from the primary sector (mainly agriculture) to highly productive jobs in the secondary sector (mainly manufacturing).

In practice, the Indian economy has witnessed movement of its labour force from agriculture, but it was channelised mostly towards the service sector. Instead of moving to manufacturing-related activities, the youth preferred to take up low-paying jobs in construction, retail, small restaurants, and as domestic, sanitation, security, and transport workers.

Construction workers in India | Source: Pixnio

According a recent report by the Confederation of Indian Industries (CII), in India, people within the age group 15 to 64 comprised of around 67% of the working age population (around 900 million) during 2020. Though the fertility rate is declining – from 5.9 in 1950 to 2.13 in 2023 – the working age population will be around a billion by 2030. This then means that around 24.3% of the global workforce will be made of Indians.

Therefore, there is a need to strengthen the sectors that can accommodate this huge influx of working population and provide them with at least a minimum respectable standard of living. 

Unemployment is a colossal problem in not just India, but also globally. Heavy industries, because of their innate importance, will continue to cater to the economy. But, they have their own limitations, and may not be a good option for countries like India. Though fiscal deficits are falling for states, they are not in a position to fund big ventures for several reasons. Lessons learnt during the COVID-19 pandemic show that entrepreneurship can be an antidote to global problems, like unemployment, inequality, low productivity, disconnect from global value chains, and the likes.

MSMEs as growth engine

Micro, Small and Medium Enterprises (MSMEs) will potentially impact the process of achieving the Sustainable Development Goals (SDGs) in scopes much greater than their size. These include SDG 1 (‘End poverty in all its forms everywhere’), SDG 8 (‘Promote inclusive and sustainable economic growth, employment and decent work for all’), and SDG 10 (‘Reduce inequality within and among countries’).

A recent report by the Association of the European Development Finance Institutions shows that globally, SMEs play a key role in job creation. They are providing two-thirds of all formal jobs in developing countries and 80% in low-income countries. However, it also cautions that much of these sustained successes of SMEs depends on local conditions, such as public services, good corporate law, and access to finance. India is no exception.

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In India, the MSME sector, especially the micro enterprises, is perhaps the spine of the national economic structure. Over the years, the SMEs have unrelentingly provided resilience to absorb global economic shocks and hardships, including odds created by the COVID-19 pandemic.

As per the 2021 annual report of the Indian government’s Ministry of MSME, the micro sector alone accounts for more than 99% (close to 630.52 lakh estimated enterprises) of the total estimated MSMEs. There are an estimated 633.88 lakh MSMEs in India; 51.25% are in rural areas, and 48.75% are in urban areas. It is, therefore, important for policymakers to attach equal weightage to both rural and urban MSMEs. In the wake of the rising urbanisation and the increasing peri-urban settlements, they need to particularly focus on strengthening the urban SMEs. 

Indian SMEs are becoming an essential engine of growth – contributing 30% of the Gross domestic Product – and creating jobs for the workforce. Hence, they are adding to both size and development of the Indian economy. The 73rd round of the National Sample Survey (NSS, 2015-16) reports that the MSME sector has been creating 11.10 crore jobs across the Country. In this, the micro sector alone employed 97% – around 10.76 crore – of the total employment in MSMEs.

A bicycle factory in Haryana, India | Source: International Labour Organisation (ILO), Flickr

Need for greater focus on MSMEs

Not only India, according to a 2017 report by the Organisation for Economic Co-operation and Development (OECD), the MSMEs contributed to 53% and 86% of employment in the United Kingdom and Greece, respectively. In the developing world, the footprint of the MSMEs are very distinct. For example, MSMEs contribute 60% of the employment in Peru, 50% in Cambodia, 80% in Kenya. 

But, as it happens, only the big pulls the funds and the funds are pushed to the big – a vicious cycle that has existed forever. Globally, as per a 2021 UNCTAD report, the top ten investment destinations are renewable energy, energy, oil and gas, transport infrastructure, mining, telecommunication, residential/commercial real estate, industrial real estate, water and sewerage and petrochemicals. The SMEs are nowhere in the picture.

For them, aid, public sector loans, and private sector investment could be prudent development finance strategies. Even in this, the private sector still does not consider the SMEs as an investable sector due to historic reasons and certain presumptions. But, the time is ripe for change. Not only employment and growth, even to attain climate-related goals – like Net Zero – SMEs will play a critical role, especially for India and the developing countries. 

The rotating presidency of the G20 has come to India at a timely moment in history. The grouping represents two-thirds of the world population, contributing to around 85% of the global GDP. Given that SMEs could be a game changer, India should push a case for better financing opportunities for them, both in principle and practice, within the G20 platform. Opportunities are scare and so, it is important to harness them on time.

Views expressed are the authors’ own.

Featured image (representational): A worker in a small furniture factory; Source: Wallpaper Flare.