India’s MSME (micro, small and medium enterprises) sector, with 48 million enterprises, contributes 37.5% to gross domestic product, provides employment to 111.4 million persons and accounts for more than 40% of India’s exports. Yet, these small units are considered inefficient compared to their large-scale counterparts. They are shackled by regulations, inadequate availability of credit and finance—especially equity capital—orthodox marketing and lack of access to global markets and adequate skills. Archaic processes and a reluctance to use information and communications technology further hobble them.

Consequently, this “distressed" sector has been often overlooked; the story of India’s growth has comprised merely of the experience of the 5,788 “listed" companies. This is about to change, thanks to new data released by the Reserve Bank of India on the finances of 237,398 non-government non-financial (NGNF) private limited companies (see here).

The ministry of corporate affairs (MCA) website shows that non-government private limited companies comprise 94% of the 1,067,925 active companies limited by shares as on 31 January 2016. The data the MCA has collected from the audited annual accounts of these small, unlisted, private companies—essentially, MSMEs—presents a heartening picture, both at an aggregate and disaggregated level. When it comes to both return on equity and efficiency, these companies are ticking all the boxes.

Aggregate level data for these companies (table 1) indicate that the growth rates of overall sales, value of production and total income of these private limited companies have increased between 2013-14 and 2014-15. While operating profits have grown at a slower pace, the profit margins—measured by the operating profit to sales ratio—have gone up from 7.7% to 9.1% between 2012-13 and 2014-15. So has the return on equity, i.e., the ratio of profit after tax to net worth, from 7.6% to 9.1%.

These firms seem to be saving their way to growth, with growth rates of gross savings (defined as retained profits plus depreciation provision) going up from 11.6% to 17.9%.

They have been net foreign exchange earners, contributing to the build-up of the country’s precious foreign exchange reserves. The net inflow in foreign currencies between 2012-13 and 2014-15 on account of these companies has shot up from ₹ 1,71,706 million in 2012-13 to ₹ 3,43,743 million in 2014-15.

That this growth has been in keeping with equity considerations is evident from the increase in the growth rates of the remuneration to employees from 16.2% to 17.6%. Such growth in employee remuneration, interestingly, comprises not just of salaries, wages and bonus, but also contributions to provident fund and employee welfare expenses. As such, these trends cannot be dismissed as reflective merely of an increase in wages at the national level.

Looking at the data at a disaggregated level (table 2) reveals further insights. Core sectors—including mining and quarrying, manufacturing of iron and steel, fabricated metal products, machinery and equipment, motor vehicles and other transport equipment, and construction—have exhibited dramatic increases in growth rates.

Within services, the surprise element is real estate, where aggregate sales have witnessed increases in growth rates from 7.7% to 23.6%. Other service sectors—including trade, transport, hotels and restaurants and computer-related activities—have all experienced higher growth rates.

How does one reconcile such data with the popular view of dismal growth in sectors such as manufacturing, mining and quarrying and the like? And more importantly, what are the implications of such data?

The alleged discrepancy between perception and reality of the India growth story clearly warrants the use of a larger database to draw conclusions regarding both growth and equity.

More importantly, the new data from RBI points to the new engines for the India growth and equity story—namely, the micro and small enterprises. The government and RBI will need to help them find their rightful place in the sun.

In this context, government schemes such Udyog Aadhaar, Start-up India, Make in India and the steps taken to improve the ease of doing business all indicate movement in the right direction. Similarly, RBI’s initiatives, such as increasing the targets for bank lending to micro enterprises and bringing medium enterprises within the ambit of priority sector lending, will help energize this sector. RBI can also ensure that the bane of MSME existence—credit non-availability—is resolved through improving the transmission mechanism of policy rate changes, as also better credit flow to the MSMEs.

Hermann Simon, founder and chairman of the international strategy and marketing consulting firm Simon & Kutcher, had popularized the term “Hidden Champions" in 1996. He attributed Germany’s export strength to these hidden champions—German SMEs, called Mittelstand. They had a revenue of less than $4 billion and a low level of recognition with the general public. It is time we recognize our own hidden growth champions.

Tulsi Jayakumar is professor of economics and programme head, PGP-family managed business, at the S.P. Jain Institute of Management and Research, Mumbai. Views are personal.

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