India’s economic boom is obscuring pressures on smaller businesses

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At a recent Mumbai conference about India’s small and medium-sized enterprises, there was much talk over the buffet lunch of pulao and gulab jamun on their prospects.

It did not always match the tone of earlier upbeat speeches at the Confederation of Indian Industries’ summit that praised government initiatives to help small business maximise India’s moment as the world’s fastest-growing major economy.

“For India to grow exponentially, we need more and more of our [small businesses] to mature into large firms in the decade to come,” said Sunil Kant Munjal, president of the confederation and chair of two-wheeler company Hero. But some summit attendees endorsed the view of those economists who say India’s growth and the rapid expansion of the country’s biggest conglomerates has obscured the pressures on smaller businesses.

The IMF is forecasting 6.1 per cent gross domestic product growth this year. But the nation of 1.4bn emerged from the pandemic with a K-shaped recovery: rich people’s incomes and spending has risen while those with fewer resources have struggled. And against that backdrop, some economists worry that behemoth business houses — from Mukesh Ambani’s Reliance Industries to the storied Tata Group — have gained market share and pricing power that could make it harder for smaller groups to compete.

Just 20 companies took 80 per cent of the profits generated by the Indian economy in the 2022 business year, double the profit percentage 10 years earlier, according to analysis by Mumbai-based fund manager Marcellus of data for listed businesses. By contrast, in a February survey of more than 100,000 small business owners by the Consortium of Indian Associations, three-quarters of respondents reported they were not profitable, and one-third claimed their business’ performance had declined over the past five years.

Faster expansion by bigger companies is “making the overall growth more unbalanced”, says Sonal Varma, Japanese bank Nomura’s chief economist for India and Asia ex-Japan. Dhananjay Sinha, head of research at Systematix, a financial services company in Mumbai, adds: “Larger companies have gained market share and smaller companies have actually lost out because of the economies of scale and the way technology has transformed the entire system.”

In July, analysts at Société Générale found that the market share of small businesses — those with annual turnover below Rs5bn (around $60mn) — had “dropped to the lowest level ever”. Using central bank data, SocGen’s Kunal Kundu says that the portion of overall sales in India from small businesses had fallen to less than 4 per cent by the first quarter of the 2023 financial year, from around 7 per cent before 2014. Likewise, according to Indian government data, their share of exports fell from 49.4 per cent in the 2019-2020 business year to 43.6 per cent in 2022-2023.

Small business revenues have been slowing persistently overall, according to Kundu. Using the same data set, which starts in 2011, Kundu showed that sales to companies with less than Rs5bn turnover have been shrinking consistently, apart from a brief expansion following the pandemic. In hard times, small businesses suffer more than large ones and then do not benefit as much when the going is good, Kundu summarised.

Government supporters point out that it is actively helping small businesses, from programmes to lift skills and debt forgiveness during the pandemic to schemes to improve credit access. Small business also has benefited greatly from India’s shift to digital payment.

Back at the conference, small business owners said they saw many opportunities. But they faced pressure from pricing, competition and bureaucracy, which managers say is improving but still haphazard. A consultant complained that major manufacturers have been lowballing him on price for the past three years, forcing him to cut his fees. One clothing designer said she was considering quitting affordable fashion, as conglomerates such as Reliance and global retailers like Zara pile into the segment.

With the fortunes of India’s small and big businesses appearing to diverge, the sector is at a “pivotal juncture”, said Sandeep Naolekar, managing director of Darling Pumps and chair of the CII’s western region subcommittee on small business. In a globalising market, Naolekar told the conference, “it’s about survival, growth and creating a legacy”.

chloe.cornish@ft.com