Indian SMEs in Global Value Chains: Status, Issues and Way Forward
| DOI | http://doi.org/10.1177/00157325221092609 |
| Published date | 01 November 2022 |
| Date | 01 November 2022 |
| Subject Matter | Articles |
Indian SMEs in
Global Value Chains:
Status, Issues and
Way Forward
Sonia Mukherjee1 and Arpita Mukherjee2
Abstract
Small and medium enterprises (SMEs) account for bulk of the enterprises in
most countries and play a crucial role in global value chains (GVCs). In India,
micro, small and medium enterprises (MSMEs) constitute around 30% of the
gross domestic product (GDP), accounts for 50% of exports and a major share in
employment. Under the Aatmanirbhar Bharat Abhiyan, the Central government
intends to enhance the share of MSMEs in exports to 60% in the next 5 years. The
government also plans to increase the contribution of the MSMEs to 40% of the
GDP. In this context, this article examines how effective the government policies
have been in the past 10 years to help Indian MSMEs integrate in the GVCs. It first
presents an overview of the MSMEs in India, focusing on their exports and global
market integration. It then examines the schemes and policies of the Ministry
of Micro, Small and Medium Enterprises, and provides an empirical estimation
(2000–2001 to 2020–2021) of the impact of government schemes/programmes
on MSMEs integration in the GVCs. Based on key informant interviews, it identi-
fied the core issues faced by the MSMEs and makes recommendation on how
to address them, so that, the targets set by the government for enhancing the
contribution of the sector to GDP and exports can be achieved.
JEL Codes: F10, G28, O10, O20, O57
Keywords
SMEs, GVCs, policy, India, financial inclusion, digitalisation
Article
1 International School of Business and Media (ISBM), Budge Budge, Kolkata, West Bengal, India.
2 Indian Council for Research on International Economic Relations (ICRIER), New Delhi, Delhi, India.
Corresponding author:
Arpita Mukherjee, Indian Council for Research on International Economic Relations (ICRIER), New
Delhi, Delhi 110003, India.
E-mail: arpita@icrier.res.in
Foreign Trade Review
57(4) 473–496, 2022
© 2022 Indian Institute of
Foreign Trade
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DOI: 10.1177/00157325221092609
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474 Foreign Trade Review 57(4)
Introduction
Globalization, trade liberalization, proliferation of trade agreements and rise in
connectivity has led to greater economic integration and development of global
value chains (GVCs) since early 1990s. This has, in turn, led to emergence of new
models of global business, which includes global sourcing, flexible production, a
focus on core business along with subcontracting and outsourcing. With the
advent of fourth industrial revolution (4th IR), technology upgradation, innova-
tion and knowledge creation have become a key component of business competi-
tiveness and efficiency (Ando & Kimura, 2005).
In most countries, small and medium enterprises (SMEs) play a key role in
inclusive economic growth and trade. SMEs are estimated to account for 80%–
99% of firms in any country and they account for 60%–80% of global employ-
ment (International Finance Corporation [IFC], 2013; World Trade Organization
[WTO], 2016). In Asia, the micro, small and medium enterprises (MSMEs)
account for 96% of total enterprises, employ 62% of the labour workforce and
contribute to around 42% of the gross domestic product (GDP) (Asian
Development Bank [ADB] & Asian Development Bank Institute [ADBI], 2015).
SMEs also have a higher rate of sales growth than large firms (Cusolito et al.,
2016). Thus, a substantial share of any nation’s economy, in both developed and
developing countries, is supported by the SMEs. These firms are the key drivers
of sustained and inclusive growth; generate employment; facilitate trade and
investment and promote innovation (BIAC et al., 2016). In case of countries in
East Asia and Southeast Asia, SMEs have also played a key role in export growth
and diversification, poverty mitigation, economic empowerment and the fair dis-
tribution of income and capital (Asasen et al., 2003; Harvie, 2002, 2008, 2015;
Harvie & Lee, 2002, 2005). Around 80% of the global trade and GVCs is through
SMEs (United Nations Conference on Trade and Development [UNCTAD],
2013).
The MSME sector is often referred to as the backbone of the Indian economy
(Mukherjee, 2018), contributing to around 30% of the GDP, around 50% of
exports and accounts for a major share in employment. India had over 63 million
MSMEs. Under the Aatmanirbhar Bharat Abhiyan, linking India to GVCs, the
Central government intends to enhance the share of MSMEs in GDP to 40% and
in exports to 60% in the next 5 years.
Literature Review
The process of globalization and the growth of value chains has offered new mar-
ket opportunities for SMEs, to integrate in GVCs and a number of studies found
that most of them are able to respond flexibly and adaptively to rapidly altering
regional and global demand (OECD, 1997). In India, a study by Mukherjee (2021)
concludes that participation in GVCs has increased between the period 2005–
2015, especially in sectors such as textiles, coke, refined petroleum, information
technology (IT) and information services. Reddy and Sasidharan (2020) found
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