Small Giants in Stormy Waters: The Story of India’s Small Businesses Fighting Global Headwinds

By Jaya Prakash Pradhan December 5, 2010 817

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Type	Journal article
Title	“Externally-oriented Small and Medium Enterprises in India: Predicament and Possibilities”
Authors	Keshab Das & Jaya Prakash Pradhan
Published	2010 · Economics, Management, and Financial Markets, 5(3), pp. 192–204 · Addleton Academic Publishers
Focus	Export-oriented Indian SMEs and the business risks exposed by the 2008 crisis
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This is a plain-language summary of “Externally-oriented Small and Medium Enterprises in India: Predicament and Possibilities” (Das & Pradhan, Economics, Management, and Financial Markets, 2010).

In short:

Indian SMEs grew into the economy’s backbone — nearly doubling to ~13 million firms and 31 million jobs between 1991 and 2007 — but their export record was modest and volatile.
The 2008 crisis hit export-oriented small firms hard (garment exports down ~10%, jewellery down ~34%) and exposed five business risks they’re especially prone to.
The paper’s contrarian conclusion: going global isn’t always the answer — many SMEs are better served by first building strong domestic foundations and financial protection.

The backbone of the economy

India’s small and medium enterprises are easy to overlook individually but impossible to ignore in aggregate. Over the reform years, they grew dramatically — and this study, led by Keshab Das, starts by establishing just how much weight they carry.

Between 1991 and 2007, the number of SMEs nearly doubled from about 7 million to 13 million, the jobs they provided rose from 16.6 million to 31 million, and their output grew roughly fourfold. By any measure, they had become central to India’s economy.

The export dream, and a reality check

Liberalisation in the 1990s came with the hope that small firms would go global. The reality was more sober. SME export growth was volatile — strong one year, weak the next — and concentrated in just eight product groups (garments, engineering goods, software, and a few others). For all the talk of globalisation, the study describes the overall export performance of Indian SMEs during the reform period as unimpressive, reflecting weak institutional support and fragile forms of production organisation.

When the storm hit home

The 2008 global financial crisis turned that fragility into acute stress. Export orders dried up, and the damage was concentrated in exactly the labour-intensive sectors where small firms cluster: garment exports fell by about 9.6%, jewellery exports by roughly 34%, and even Gujarat’s promising pharmaceutical units found themselves running below capacity.

Then came an unexpected second-round effect. As export-oriented SMEs lost foreign customers, they pivoted to the domestic market — but these firms were typically more efficient and tech-savvy than their home-focused peers, so their arrival squeezed the domestic-market SMEs from another direction. Smaller, locally focused firms found themselves pressed on two sides at once.

The predicament: five risks

The heart of the paper is its account of why small firms are so exposed — the specific risks they carry that larger companies can absorb.

Each of these is survivable for a large, diversified company and potentially fatal for a small one. A single lost customer, a delayed payment, a spike in input costs, the illness of a sole proprietor, or an uninsured flood can each end a small business. The crisis simply brought several of them to a head at once.

The way forward — and a contrarian lesson

The paper is constructive about responses. At the firm level: diversify the customer base, write price-protection clauses into contracts, take out proper insurance, look harder at domestic-market opportunities, and invest in better business practices and technology. At the policy level, it argues the state must play a proactive role in building SME competitiveness — recognising that weak institutional support, not just firm-level shortcomings, lies behind the modest export record.

But its most striking conclusion is contrarian. In an era that celebrated going global, the study argues that being “global” isn’t always the answer. For many Indian SMEs, the surer path runs through building strong domestic foundations, developing financial protection, creating robust processes, and pursuing sustainable rather than rapid growth. The potential of the domestic market, well served, may matter more to most small firms’ survival than the lure of exports.

Read the academic abstract

This paper addresses emerging issues concerning externally-oriented SMEs in India and the nature of the important business risks they faced during the global financial crisis. The unimpressive export performance of SMEs during the reform period also reflects the limitations of institutional support and weak forms of production organisation. The state needs to play a proactive role in enhancing SME competitiveness. While financially well-protected Indian SMEs are likely to be more competitive and efficient, a greater recognition of the potential of the domestic market — and the provision of business-facilitating infrastructure — holds the key to the success of SMEs.

Cite this article

Das, K., & Pradhan, J. P. (2010). Externally-oriented small and medium enterprises in India: Predicament and possibilities. Economics, Management, and Financial Markets, 5(3), 192–204.

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