Thursday 11 August 2016

Why India's SMEs lack innovation?

India is ranked 81 out of 141 in Global Innovation Index, which reflects to low innovation capacity of its private sector and Small Medium Enterprises (SME). Government of India classify SME to Micro, Small and Medium Enterprises (MSME). According to Ministry of MSME, India's 49 million registered MSME employed 111 million people in 2014 contributing around 37% to India's GDP. According to National Innovation Survey, 34% of the sample size found to be innovative. Majority of the firms were buying new machines to improve quality by reducing costs.

What makes startups different than MSME? India has the second largest startup ecosystem in the world. India's startup are creating pathbreaking solutions in the field of robotics, payment banks, transportation etc. A startup is a searching for answers it will sell, the customer it will serve and the way it will earn money by delivering value. Whereas, a SME is independently owned business run for profit for local markets. SME owner do not dominate the space they operate in. SMEs generally lack in financial capacity and the staff to undertake structured and sophisticated R&D. Most of the SME are operating in the existing product rather than making a new product. Startups raise funding on the basis of R&D but it found that banks and NBFC do not fund SMEs for innovation. A sales approach would never lead India's SME to holistic R&D.

Barriers to Innovation in Indian SME

To improve the innovation performance of Indian SMEs, it is important to understand key barriers in the innovation space. The barriers to innovation are classified into six categories: people, finance, information, government policies and infrastructure. is of opinion that the Indian market is mature to accept innovative products. Chinese cheap electronic rule the markets in Mumbai because of its innovation and cheap price.

People and skills

Development and implementation of innovative products demand skilled labour. The need for specialised skills in the form of scientists, technicians and engineers is more apparent in case of R&D. Highly educated students from India's IIT and IIM wish to be entrepreneurs. If not, they want to play a crucial role in MNCs. SMEs are no have option left but to employ non-skilled labour at low salaries. Small Startup encourage get skilled labour by giving out a small portion of company's share. In SMEs, there is distinction between owner and employees. The situation demands more targeted capacity building programs on internal management. There needs to be a system where SMEs have access to pool of skilled labour for conducting specific work.


The approach of banks towards SME needs to change. Most Credit Manager see the balance sheet of the SMEs and then decide whether to fund them or not. The future plans or innovation capacity of the firm is neglected. The MUDRA scheme launched by PM Modi has a dedicated fund for innovative SMEs. Startups and SME should be rated on innovation. Flipkart, India's largest e-commerce company is in losses since the launch year, but yet Kotak Mahindra Bank has given a loan of Rs 500 crores to them. Innovative products are accepted by the market than sales-pitched products. There is an urgent requirement of change in perspective of lending institutions. #StartUpIndia and MUDRA schemes will enable quick funding for R&D focused organisations.

Information as a barrier

Timely access to valuable information is critical for SMEs to gain strategic advantage in pursuing innovation. The information barrier refers to access to information on technology and markets. SME also lack information regarding government policies which support innovation. Many SME in India are unaware of the schemes run by National Small Industries Corporation (NSIC) and SIDBI. Branding of key scheme into a national campaign is much required. Modi's #StartUpIndia and MUDRA consists of old dish in a brand new platter.

Government Policies

The perception of government as a barrier rather than a facilitator for SMEs is serious issues. India is ranked at 130th globally in World's Bank 'Ease of Doing Business' survey. The low rank perceives the burdensome environment in which these SMEs operate. Modi promises least government participation in compliance. He also announced the three year inspection and tax breaks for newly founded MSMEs. The perception of most MSME owners in changing but it will still take some more years for holistic results.


It is unlikely for an SME to invest in laboratories and testing facilities. Government and Incubators need to invest more by building new research parks in key manufacturing zones. Most young startups use research parks built in there educational campuses. Lack of research zones is the main reason why India leads in technological startups rather than scientific, defence related companies.

Download the full report here.

- Chaitanya Kulkarni


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