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Micro businesses forced to remain micro; here’s what prevents them growing to small and medium scale

Sandeep Soni

Out of nearly 98 per cent of all Indian exporters, which are MSMEs, a staggering 83 per cent are micro-enterprises while the remaining involves small and medium businesses, according to research by the trade finance company for Indian exporters — Drip Capital. This huge imbalance between the ratio of micro and small and mid-size businesses has been defined as the Missing Middle. "In developed markets, around 50 per cent of the entities are micro and 40 per cent are small/medium," D&B had said in one of its releases last year. "The optics of the India distribution shows a gap, which economists refer to as 'The Missing Middle'."

The challenge for micro-businesses has been scaling up and growing to become a small and medium enterprise primarily due to lack of access to capital apart from infrastructure, skilled labour and power supply issue. In fact, access to formal sources of credit for small businesses is only 12 per cent that comes from non-banking and government institutes, small banks, public sector banks, private sector, and foreign banks as the majority 67 per cent comes from informal sources such as money lenders, friends and family etc.while 21 per cent is sourced from equity finance, D&B said recently. "Every company relies on borrowing/ raising capital in order to expand. While the micro-firms in India indeed suffer from a multitude of problems, it is no hidden fact that access to capital is one of the foremost problems plaguing the sector," Drip Capital co-founder and co-CEO Pushkar Mukewar told Financial Express Online.

Also read: Non-tariff barriers: What government should do to ensure MSMEs remain competitive globally

The Missing Middle in MSME exports is more pronounced in comparison to other emerging countries such as China, Chile, Mexico and the Philippines. While India's exports comprised of 83.8 per cent from micro-units, 13.4 per cent from small businesses, 2 per cent from medium units, and 0.8 per cent from large businesses, China's exports had 56 per cent, 35 per cent, 7 per cent, 3 per cent share from micro, small, medium and large businesses. Likewise, for Chile, the share stood at 72 per cent, 20 per cent, 4 per cent and 3 per cent respectively; for Mexico, it was 72 per cent, 17 per cent, 5 per cent and 5 per cent respectively. While the Philippines's micro, medium and large businesses share — 82 per cent, 3 per cent, and 3 per cent respectively to the country's exports mirrored that of Indian micro, medium, and large units, but its small businesses' contribution at 12 per cent was below Indian small businesses' share.

"The latest data of 2018 was collected through an international trade intelligence portal by S&P. This research was done by analysing export trends across various geographies that are clubbed together under the umbrella term "emerging economies. The sample size for the research was sufficiently large and takes into account nearly 1.07 lakh exporters for India, 32,000 exporters for Mexico, 3.02 lakh exporters for China, 8.3k exporters for the Philippines and 6.1k exporters for Chile," said Mukewar.