India will have to leverage its sizable home market to become more competitive and scale up production to enjoy the benefits of scale economies
Promoting the micro, small and medium enterprises (MSMEs), enhancing skills to build future workforce and larger exports, focussing on high-end manufacturing, taking digital India to the next level and promoting cleaner energy sources for sustainable growth are the main six pillars for India’s gross domestic product (GDP) growth story, according to a joint report by Deloitte and the World Trade Centers Association.
As India seeks to become the third-largest economy in the world over the next three years and a developed nation by 2047, it will have to leverage its sizable home market to become more competitive and scale up production to enjoy the benefits of scale economies.
The report titled “Karnataka: Powering India’s Growth” stated, “It will have to ensure inclusive and broad-based growth by ensuring the right environment for investment opportunities, strengthening governance, and stepping up technology transformation while pursuing sustainability’s decarbonisation targets.”
At the end of FY23, there were 75 million micro, small, and medium-sized (MSME) businesses in India, accounting for around 123 million jobs. The MSME sector accounted for almost 30 per cent of the country’s GDP and 43.6 per cent of its merchandise exports.
Delayed payments and access to finance have always been an issue for smaller firms as only 16 per cent of SMEs get access to timely finance, resulting in small and medium firms being forced to rely on their resources.
In early 2023, a report by GAME with Dun & Bradstreet (D&B) and Omidyar Network India highlighted that an estimated 5.9 per cent of the gross value added (GVA) in the Indian economy— Rs 10.7 lakh crore is locked up in delayed payments from buyers to MSME suppliers.
Deloitte report added, “Recognising the role of the MSME sector in the economy, the Indian government will have to ensure that the sector rebounds strongly by promptly addressing the structural and institutional challenges faced by the sector through the right policies and recommendations.
It stated that measures around formalisation, addressing infrastructural bottlenecks, encouraging exports, and promoting digitisation will go a long way towards improving the sector’s contribution to employment, income and exports.
Experts has said that efforts will have to be focussed on elevating quality standards and preventing brand dilution from low-quality products. This may require the government to grant a level of exclusivity to the MSMEs and encourage them to protect their intellectual property, inventions (with the help of patents), and designs (by legally registering the design).
“To encourage innovation and adoption of technology, the government must make its digital public infrastructure accessible and affordable for MSMEs to scale up businesses and their customer base. This will also help boost entrepreneurship and create job opportunities, especially among women, where the potential remains untapped,” the report added.
Preparing India For Larger Exports
Talking about how India can prepare itself for larger exports, the report mentioned that India will have to play to its strength. Backed by skilled talent and infrastructural facilities (such as the 5G rollout), India’s service exports will grow, and it must benefit from the changing trade landscape and digitisation of trade by capturing a greater share of global technology services.
Currently, India’s exports account for just 2.1 per cent of the global exports of goods and services. Its share in global merchandise exports is even smaller, at 1.7 per cent. Given the dominance of GVC exports in overall exports, no country can sustain rapid growth in exports without improving its GVC participation.
As India gears towards export-led growth, it must ensure inclusive development of the disadvantaged sectors by forging new partnerships and trade agreements that offer greater access to markets and resources. “This can be achieved by building strong trade relationships with partnering nations (as India is already doing by engaging in several free trade agreements (FTAs) and positioning the country in sectors, such as fintech, healthcare, technology, and education, where it has a strong comparative advantage,” the Deloitte report added.
India’s Economic Growth
According to the recently released estimates, the National Statistical Office (NSO) has pegged the economy to clock a growth of 7.6 per cent in the financial year (FY) 2024. Given the strong macro-economic fundamentals, consumption and investment are expected to maintain if not drive growth higher in FY25.
With gradual improvement in the global economic outlook, exports are expected to register stronger growth. GVA growth is expected at 7.2 per cent from 6.7 per cent in FY24 led by broad-based improvement across sectors.
“Revival in the agriculture sector on the back of normal monsoon is an assumption here. Based on the above, we expect the Indian economy to clock a growth rate of 7.8 per cent in FY25,” said Bank of Baroda in a recent report.
The BoB report added that government consumption will register growth at 6.6 per cent for the same period. The gross fixed capital formation (GFCF) is expected to grow by 9.3 per cent in FY25.
In addition to the continued growth in government capex, a pickup in private capex is expected that will be broader based. “This will result in more in the second half of the year as higher consumption leads to improvement in capacity utilisation,” according to the report.
The global economic outlook is looking up gradually as has been evident from the recent projection by the International Monetary Fund (IMF) which expects global growth at 3.2 per cent in CY25 (3.1 per cent in CY24).
“Lowering policy rates by global central banks will provide further impetus to the growth story. Against this, exports will register improvement even as there is some uncertainty related to the Middle East,” the BoB report mentioned.
