November , 2017
SMEs are turning into a big growth driver in SAARC countries
12:51 pm

Tushar K. Mahanti

If you say that Small and Medium Enterprises (SMEs) play a major role in the economic growth of a country it would look a cliché. But the fact is that SMEs do play a pivotal role in the economic life of a nation. More so for emerging economies where they contribute up to 60% of total employment and about  40% of national income.

The role of SMEs and their performance thus, are major issues in South Asia which comprises of emerging economies. The South Asian Association for Regional Cooperation (Saarc) which was set up with the objective of economic cooperation between the member countries considers SMEs to play a vital role towards this goal. Saarc countries have designed policies for the promotion of this sector, though with uneven results. But despite that their faith in SMEs is ever growing.

SMEs are now getting the highest priority among the policymakers of Saarc due to their proven multidimensional contribution to the socioeconomic environment of a country. These enterprises are easy to start, need comparably less capital, generate more employment and produce goods that meet local demands as well as contribute to export earnings. Definition of SMEs is based mainly on indicators of replacement cost – invested capital, number of employees and yearly revenue. Size of these indicators varies from country to country based on the socioeconomic condition of the country.

But if the definition of SMEs varies from country to country their contribution to the economy remains significant in all of them. In Bangladesh, for example, SMEs play a significant role for the country’s accelerated industrialisation and economic growth, employment generation and reduction of poverty. They account for about 45% of manufacturing value addition, about 80% of industrial employment, about 90% of total industrial units and about 25% of the labour force. Their total contribution to export earnings varies from 75% to 80%.

The industrial sector contributes about 31% of the country’s gross domestic product, most of which comes from the SME sector. The total number of SMEs in Bangladesh is estimated at 79,754. About 93.6% of these units are small and the rest are medium.

About 60 to 65% of all SMEs in Bangladesh are located outside metropolitan areas of Dhaka and Chittagong. The sector has created about 15 lakh jobs between 2009 and 2014. Now private and foreign banks disburse half of all

farm loans and a third of these are going to SMEs.

One reason for the success of this sector in Bangladesh is that people here exhibit lesser ability in processing capital and machinery. SMEs are labour intensive and require comparatively less capital. For a developing country like Bangladesh, SMEs are a cost effective way towards the reduction of unemployment. Since Bangladesh does not have many private sector large scale industries it is depending on the SME sector for generation of non-agricultural jobs.

The story is almost the same for the island nation, Sri Lanka. The country has more than an estimated one million registered SMEs, each employing three persons or more on an average. Taken together other micro enterprises and SMEs that are not registered, the sector is making a very sizable contribution towards employment generation and GDP growth of the country.

Based on recent success the Sri Lankan government is making special efforts to promote the sector. For the purpose of supporting and encouraging SMEs, the High Potential Promising Clusters have been identified.

In determining these clusters criteria such as the value addition, use of local raw materials, export orientation, export connectedness and forward and backward linkages are considered as benchmarks. Other flagship sector with high spillover effects, technologically driven innovative products and employment generation were other criteria used to choose these clusters.

As per government’s own estimates about four-fifths of the businesses in Sri Lanka that falls under SMEs contribute over 50% to GDP of the country. Of the total employment, SMEs account for about 35%. These figures clearly reveal the importance of SMEs in Sri Lankan economy and the immense potential they have to generate more jobs and raise the country’s GDP.

Emboldened, the government has recently launched the Small and Medium Development Loan scheme to address the problem of finance of the sector. A huge ‘ 4.4 billion was allocated for the scheme in the last budget for encouraging young entrepreneurs to develop their enterprises and get on to exports that will support the economy.

In Pakistan, the SME sector is treated with exclusive growth intention. The 5-Year SME Development Plan developed by the Small and Medium Enterprises Development Authority (SMEDA) has been made  apart of Pakistan Vision 2025 approved by the government.

Only in 2016 over 7,000 SMEs were provided direct services and private investment of ‘ 1.25 billion was mobilised through SMEDA across various sectors. Training programmes and capacity building initiatives in various business areas were conducted with over 6,500 participants. This indicates the efforts of SMEDA to develop the sector.

Pakistan is an economy comprised mainly of SMEs. The significance of their role is clearly mirrored by statistics. According to recent estimates there are approximately 3.2 million business enterprises in Pakistan. Enterprises employing up to 99 persons constitute over 95% of all private enterprises in the industrial sector and employ nearly 78% of the non-agricultural labour force. They contribute over 30% to GDP and about 25% to exports of manufactured goods besides sharing 35% in manufacturing value added.

In landlocked Nepal SMEs account for more than 90% of total industrial establishment which generate about three-fourths of employment in the industrial sector. The sector has more than 70% share in industrial sector’s contribution to GDP. In the absence of large scale industrial establishments the role of SMEs in considerably greater in Nepal compared to its big neigbours. What is significant is that most of the SMEs here cater to its inherent strength and are involved in manufacturing handicrafts, textiles, garments and in travel and tourism business. Interestingly, these SMEs earn large sum of foreign currencies for the country.

The growth of this sector in Nepal has been phenomenal of late and its number surged by more than four times to 3.20 lakh by 2015-16 compared to about 69 thousands a decade ago according to the Department of Cottage and Small Industries of Nepal.

Growing against a challenging environment, the SME sector in India experienced several highs and lows in the past few years. With Indian economy touted to be a major economic force in the coming years, a lot of impetus is given to this sector by successive governments. Realising the significance of SME sector in creating jobs, fostering entrepreneurship and innovation and its contribution to GDP numerous initiatives have been taken by the current government too.

Working in tandem with the larger goal of pushing for higher economic growth, the implementation of many reforms made the SME space relatively bullish in 2016. Backed by

these initiatives the sector, considered to be a driving force in India’s quest for higher economic growth, is expected to contribute more in the coming years. What is probably more important is that a bullish SME sector will support India to improve nation’s financial inclusion drive and will bring down the rural urban divide. According to government estimates, the sector accounts for about 45% of the country’s industrial output and some 40% of the country’s total export earnings. The sector employs a huge 60 million people currently and is creating about 1.3 million jobs a year on an average.

Interestingly, despite the recent economic slowdown the sector has remained confident about future. According to a recent study by US-based financial services corporation American Express SMEs in India are more optimistic compared to its neighbours about domestic economic growth in the next 12 months.

The study ‘American Express Global SME Pulse 2017’ finds that as many as 71% of the surveyed SMEs have expressed ‘optimism in the economy’. Among the Asian countries included in the survey were China and Japan stood at 54% and 62%.

Maybe Indian SMEs are more optimistic because of continuing economic reforms SMEs but in other Saarc countries too they are set for higher growth. Of course, there are constraints and if the local conditions of different Saarc countries have influenced the growth pattern and characters of the SMEs, their problems seem to be largely common. Despite the importance of the SMEs in the growth of the country’s economy, the sector is facing various problems and is often not getting less than adequate support from the government.

The non-availability of adequate and timely banking finance seems to be the main hurdle across the Saarc countries. Limited capital and knowledge as well as non-availability of suitable technology too are hampering their growth in the region. Low production capacity and ineffective marketing strategy often eat into their bottomline. Constraints on modernization and expansion and inadequate supply of skilled labour at affordable cost are also causing serious hurdle on their growth potential.

Despite these constraints SMEs, however, are growing at a reasonable rate in the region giving hope that once its problems are sorted out the sector will meet its growth potential. This process will get added stimulus if regional cooperation among the member countries. -As told to BE’s Sangeeta Mahapatra.

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