Igniting India’s SMEs

Is it fair to describe certain markets as ‘Emerging’ when they are not in any way converging with developed world living standards?

Over the last decade, while China continued to power towards middle income status, many of the countries in the ‘Emerging Market’ bracket have lost ground on the US, both in terms of GDP per capita and - comprehensively - equity market value.

‘Those countries which have successfully escaped low-income status tend to be those that have somehow lit a productivity spark, enabling growth to suddenly accelerate, and drive a virtuous circle of reinvestment in longer-term pillars of development, such as education and infrastructure’ says Rebecca Lewis, co-CEO of Arisaig Partners.

‘Those that fail to do this disappointingly fall back.’

India now appears to at least have its hands hovering over the productivity matchbox. Modi-era reforms such as GST, unifying a 28-state market which was previously less integrated than the EU, could prove genuinely transformational. A business-friendly mindset now appears to have permeated through all levels of society – the reduction of corporate tax rates from 35% to 25% in 2019 passed with barely a whimper despite a deep-seated national fondness for protest. As the country enters a period of demographic dividend, adding around 9 million people to the workforce each year, it appears widely accepted that the business community is critical to providing society with the jobs it needs.

Big corporates, often for the wrong reasons, dominate the headlines but, alongside agriculture, SMEs are still the lifeblood of economic activity in India, and often the primary destination for workers exiting the informal sector. India’s 40 million SMEs comprise 40% of the country’s workforce,¹ with agriculture accounting for half. Yet despite their importance, SMEs still face a huge number of obstacles, both bureaucratic and physical.

Happily, digitalisation is beginning to tilt the scales more in their favour. Many SMEs – particularly those providing basic B2B products such as building materials, tools or textiles – have historically been constrained in sales terms to a hyperlocal physical market. Accessing buyers online expands the market size for these sellers from a handful of customers to potentially thousands. Yet, unsuited to consumer-facing e-commerce platforms and inexperienced in digital selling, these SMEs need a service tailored to their needs, ideally with a ‘feet on street’ presence to help adapt their offering to an online audience. After all, your average SME entrepreneur in India has a simple high school diploma.

The leading candidate to meet this requirement is IndiaMart, a company started 27 years ago by two cousins who belonged to a middle-class business family in Uttar Pradesh (India’s most populous state, and also its second poorest). With the advent of internet in India and their previous experience working in the IT industry, they had a vision to harness the power of digitalisation for SMEs like their own family business. Bootstrapped from just a USD1,000 initial investment, IndiaMart focused on solving real problems for its SME client base; namely helping SMEs find the right customers for their products. Recognising the intricacies of B2B selling and the need for relationship building in India, IndiaMart focuses on matching sellers with potential customers. Customers pay up front for access to the platform so need to see a clear and rapid return on their investment in order to encourage resubscription.

As the business has grown, so focus has shifted on providing SMEs with digital solutions beyond sales. Accounting and tax, for example, remain obvious pain points for Indian entrepreneurs which IndiaMart’s tools can help to relieve. This is a country where value for money is a near obsessive requirement for prospective customers; where middle-class families will visit multiple supermarkets in a day to be sure they are getting the best deals. For a business like IndiaMart to have built organically to a scale in the region of a million active users today, it is clearly providing significant value to the SMEs which are so critical to India’s accelerating development.