Why Do Small Businesses in India Struggle to Grow?

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In today’s edition of The Daily Brief:

1. Why do India's MSMEs stay small

2. Will steel soon be more expensive?

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Why do India's MSMEs stay small

Why do small businesses in India find it so impossible to get larger?

A recent ICRIER report got us thinking about this question. This is, after all, a foundational problem for our economy. Small businesses — or technically, “Micro, Small and Medium Enterprises” (MSMEs) — are deeply important to the India growth story. Really, they’re the heart of our economy. They make for 16.5% of the value our economy creates, employ around 120 million people, and form the industrial underbrush for the rest of our economy. If these enterprises can’t grow, there’s a ceiling to how far India can grow as a whole.

And that’s precisely what we’re seeing. Despite reforms, schemes and sustained economic growth, most of our MSMEs can’t seem to capture much of India’s economic upside. They’re overwhelmingly small and underpowered. This fact explains so many of our economy’s problems: from why we’re always short on jobs, to why we can’t seem to establish a manufacturing presence.

So what’s going on? Why do Indian MSMEs, especially manufacturing ones, find it so hard to scale?

That’s a huge question, frankly, and we can’t promise we have all the answers. But from the little we can see, our small businesses are trapped under a mountain of structural issues. At the same time, as we shall soon see, there are also reasons for hope.

The sheer smallness of India’s businesses

Despite how central they are to India’s economy, MSMEs are economic laggards.

Why so? The biggest problem, perhaps, is just how small these businesses are. A vast majority of India’s small businesses are micro enterprises; that is, they employ fewer than 10 people.

Now, it’s hard to really keep a track of MSMEs, given how little data we have. The most professional of these businesses are registered on the government’s Udyam portal, and that data’s quite revealing. 98% of the businesses on the portal are micro-sized. While we don’t know much about the rest, it’s unlikely that they’re any bigger. In fact, 85% of MSMEs that haven’t registered on Udyam are own-account workers. That is, they employ nobody at all.

The problem is worse, if anything, in the manufacturing sector. Here, informality is even more dominant — in fact, only 11% of manufacturing MSMEs are even registered.

The small size of these businesses bleeds their productivity. While bigger firms are more productive than small ones anywhere in the world, simply because of their ‘economies of scale’, India faces a particularly perverse version of this problem. India’s small businesses are only a quarter as productive as large ones. That is, each worker in a large business creates four times as much value as those in smaller ones. Things are even worse in manufacturing, where small businesses are just 14% as productive as large ones.

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That’s a lot of wasted human effort that isn’t doing much for our economy. But why are we so badly off?

The structural constraints on Indian businesses

There’s no innate reason that Indian businesses should stay small. They are held back from growing. Their small size is the result of a range of wider problems with the Indian economy, many of which make it difficult or unattractive for our businesses to scale. Here’s a sample of some of the key problems that researchers have found:

1. India’s regulations inhibit growth

Doing business in India is complicated. Any business must comply with myriad regulations – from taxes, to license requirements, to inspections. To do business, therefore, is to contend with severe bureaucratic complexity.

The bigger you grow, the worse these constraints become. Large, formal firms have massive input costs because of all the regulations, taxes, and compliances they have to follow. Meanwhile, small informal firms can avoid many of these costs. This makes it inconvenient for informal enterprises to formalise or expand. The result? We have an economy with too many tiny, low-productivity firms and too few large, competitive firms.

According to one famous study, in fact, if we were to somehow remove all these distortions, the productivity of our economy can go up 50-60%.

Take our labour regulations, for example. Under Indian law, you come under an avalanche of obligations as soon as you cross more than 100 workers. For instance, you need to take the government’s permission to lay people off, or to close a plant. These requirements severely affect what businesses can do in response to market conditions. This sets off a game of cat-and-mouse, as businesses try all sorts of tricks to get around such limits. For instance, many large Indian businesses hire people on a contract basis instead of taking them full-time, in order to give themselves flexibility. One study, for instance, found that 38% of all workers in businesses with more than a 100 people worked on a contract basis.

All these complications discourage small businesses from trying to get to ‘medium’ status. Although workers at large, formalised businesses get strong legal protection, very few such jobs are available. Instead, we have a segmented labor market, where most Indian workers have no job security—and most firms have no reason to formalize or grow.

2. MSMEs don’t get much financing

Indian MSMEs don’t have enough capital, and finding financing is a nightmare. See, MSMEs are bad candidates for bank loans. They often lack sufficient collateral, credit history, or banking relationships, and that makes it hard for them to get the money they need — to expand, upgrade their technology, or even find enough working capital to get by.

Informal enterprises have it the worst — they’re cut off from the formal banking system, and have to fall back on informal sources of money, like family, friends, or even moneylenders. These could work if you’re just trying to survive, but they aren’t nearly enough if you really want to grow. In 2012, for instance, an IFC study found that MSMEs had unmet credit needs of roughly $418 billion. That number could be even larger today.

These money constraints stop tiny household firms from “graduating” into larger enterprises. One study, in fact, found that around one-third of informal firms saw finance as a major constraint to their growth. Interestingly, the same study found that when informal firms gained better access to banks — thanks to branches opening nearby — their odds of hiring non-family workers jumped by 25%. That is, these branches made them far more likely to become real employers.

This lack of finance also stops them from investing in productivity. Without enough capital, small businesses cannot invest in modern machinery, better inputs, or process improvements.

Now, as we’ve spoken about recently, policymakers recognise these issues. Schemes like priority sector lending pushes a lot of finance to SMEs. Yet, there remains a large financing gap, especially for small and informal firms.

3. We’re constrained by the quality of our human capital

Indian firms also have serious managerial problems. Many Indian manufacturing MSMEs are family-run businesses, with owners who often have no formal management training. They tend to make ad hoc decisions, based on tradition or intuition rather than modern best practices.

In one landmark experiment, for instance, researchers arranged for free management consulting for many of Mumbai’s textile plants. This wasn’t anything advanced — they were only given training on basics, like inventory management, quality control etc. The results were stunning: firms that adopted their recommendations improved their productivity by 17% in just one year. Three years later, many had even opened new plants. Those that didn’t get this training, in contrast, didn’t improve at all.

Why hadn’t they taken these basic steps earlier. Most owners didn’t even know these practices existed, or severely underestimated their benefits. Many were also so occupied with day-to-day firefighting that they had no bandwidth to strategise or put new practices in place.

India also has a more general human capital problem. Small firms find it difficult to attract and retain high-quality talent. They often cannot pay as well as large firms and offer limited career growth. Without skilled technicians, engineers and managers, however, small businesses struggle to adopt new technologies or improve quality.

4. There are many other problems

This is just a sample of the problems that India’s small businesses face. This is compounded by a variety of other barriers to our ease of doing business. To name a few:

• India has poor infrastructure. Businesses pay high amounts of money for patchy power supply. Our logistics networks, too, are in poor shape, which drags their ability to push out their output.

• The small scale of Indian businesses tends to descend into a vicious cycle. Because of their limited reach, Indian small businesses act in highly local niches, and lack the connections to supply to large companies, or to foreign buyers. This limits their ability to tap into lucrative sources of revenue, which limits how much they can scale.

• India’s small businesses have been slow in embracing technology, because of the capital investment and talent it requires.

And so on. All these problems play into each other, and compound the worst of their effects. As a result, India has a problem of chronically small firms, that never grow into their full potential. And given how central these are to our economy, our overall economic potential, too, is severely limited.

Is there any hope?

Amidst all this gloom, ICRIER finds a surprising lever of growth — e-commerce.

Although the COVID-19 pandemic sent our economy into a crisis, it had a surprising silver lining. The pandemic sparked a generational shift, sending many Indian businesses online. This isn’t even a fringe thing. Of all the MSMEs that ICRIER surveyed, 32% said over half their sales came from online platforms. Theirs may not be a representative sample, but it’s still quite impressive.

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This isn’t a one-shot solution, of course. E-commerce doesn’t apply to every kind of MSME. If you make heavy industrial components or provide fabrication services to a large manufacturer, there’s little the internet can do for you. But for a significant subset of MSMEs, online platforms have emerged as a serious growth engine.

To the right MSME, e-commerce brings many benefits:

• They’re a vital source of revenue: According to ICRIER, e-commerce integrated MSMEs are clocking strong performance. Many MSMEs that use e-commerce report annual revenues of over ₹1 crore. A meaningful chunk even crossed the ₹5 crore mark — a threshold that very few MSMEs typically reach. Turnovers are growing at a healthy 13%, and critically, their profit margins are higher too. Nearly half of these digitally integrated businesses report profit margins above 20% — which is rare in small-scale manufacturing.

• E-commerce is a forcing function: To survive in the e-commerce ecosystem, businesses need to upgrade themselves. ICRIER’s research notes that many small firms, once they’re on board, have to make a range of investments — in processes, quality, staffing, digital tools — all of which make them more competitive. For instance, 62% of all firms began training their employees after onboarding themselves on an e-commerce platform. Nearly 50% invested in R&D. Of course, not all firms can cope with these requirements. Many fail, and drop off after a while. But the ones that stick tend to grow.

  

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• E-commerce helps with accessing finance: When firms work with e-commerce platforms, they generate a ‘digital footprint.’ Suddenly there’s a data trail: invoices, order volumes, fulfilment records, even customer feedback. This has a curious effect; it helps them access finance from the formal system. It gives lenders a way to assess their creditworthiness — and makes MSMEs seem like less risky borrowers.

• E-commerce is becoming a key export channel: E-commerce networks help MSMEs bridge their networking gaps. They create a way for small businesses to export, without needing relationships, agents, or knowledge needed to access international markets. They also make it easier for small businesses to understand how foreign buyers think, which lets them cater to those customers more effectively. In some cases, these platforms even handhold MSMEs through certifications and packaging norms needed for global markets.

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Of course, e-commerce is not perfect. India’s small businesses face serious issues, and e-commerce can do little to solve many of them. But it’s one of the few levers that seems to work for them. In a sector long defined by stagnation, that’s no small thing.

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Will steel soon be more expensive?

India has just launched an anti-dumping investigation into imports of low-ash metallurgical coke—or met coke—from six countries: Australia, China, Colombia, Indonesia, Japan, and Russia.

This means India suspects these countries are selling met coke to Indian companies too cheaply — at prices that are lower than they charge in their own countries, or what they spend to make it in the first place. And now, the government wants to check if this is hurting local producers—and if it is, it may impose duties to level the playing field.

But before we dive into what this means for India’s steel industry and why it’s becoming such a heated issue, let’s take a step back and explain what exactly met coke is.

What is Met Coke, and Why Does it Matter?

Met coke is short for “metallurgical coke”. That’s an important part of making steel.

You can’t mine met coke out of the ground — you make it from another raw material called coking coal, which is a special kind of coal. Now, coking coal contains all sorts of impurities and moisture, which can ruin the steel you’re trying to make. So you “carbonise” it — you heat that coal to extremely high temperatures, but you deprive it of oxygen, so that it doesn’t burn. This removes moisture, gas, and other impurities, leaving behind the hard, carbon-rich, porous substance you want: met coke.

So, what does met coke do? In steel plants that use “blast furnaces” — which is what most Indian steelmakers do — met coke plays three crucial roles:

1. Fuel – it produces the high heat needed to melt iron ore.
   

2. Reducing agent – it provides carbon to remove oxygen from iron ore, leaving behind molten iron.
   

3. Structural support – it keeps the furnace bed porous enough for gases to flow while supporting layers of raw material inside.

If you want to actually see how it’s made and used, here’s a really good video that shows the process.

Why is there an investigation?

Now for the actual headline. Over the last four years, imports of met coke into India have more than doubled.

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Why is that?

If domestic producers — who are struggling to compete with this influx — are to be believed, that’s not just because of greater demand. It’s because countries like China and Russia are allegedly selling it cheaper than the cost of making it. That’s called dumping. Under global trade rules, countries are allowed to investigate such practices and impose anti-dumping duties if needed.

Of course, there are no conclusions just yet. The government has only started its investigation, and the whole thing could take six to nine months to complete. But if it confirms these charges, you might see anti-dumping duties being imposed on those six countries.

This whole anti-dumping investigation didn’t come out of the blue. Back in December 2024, the Indian government imposed a quota on low-ash met coke imports — 1.4 million tonnes for Jan–June 2025, down from 2.4 million tonnes in the same period last year. This hit some countries in particular. For instance, it stopped Indian companies from importing more than 33,182 MT of met coke from countries like Indonesia in any quarter, even though we actually imported more than ten times as much during the same time last year.

The goal? Force Indian steelmakers to buy from local coke producers. The latest investigations may just be one more step in this direction.

The coke vs. steel fight

Here’s where it gets interesting. These investigations don’t help all Indian companies. In fact, steelmakers like JSW Steel would rather that the government does not interfere with these imports. They strongly prefer imported met coke, in fact — not just because it’s cheaper, but because it’s better.

Imported coke has lower moisture, better particle size, and higher strength. Domestic met coke, on the other hand, is often inconsistent in quality, and has operational drawbacks like causing blast furnace choking. So steelmakers were relying on imports not just for cost savings—but also to keep their operations smooth.

That said, the cost savings matter greatly too. Met coke is a huge cost for steelmakers. While companies like JSW don’t break down this number specifically, here’s what we know:

• Raw material costs usually make up around 50–60% of a steelmaker’s total costs.
  

• Of this, coking coal—and by extension, met coke—accounts for roughly 15–20%.

So, any increase in met coke prices—whether due to import duties, quotas, or switching to lower-quality domestic coke—hits margins hard.

Of course, this isn’t good for the business of domestic coke-producing firms. Local coke makers say they were running at less than 50% capacity due to the flood of cheap foreign coke. In fact, analysts say imported coke costs about $395/tonne, while domestic production costs go up to $460/tonne. For these producers, those foreign prices were unsustainable. When the government placed quotas last year, it was a much-needed reprieve.

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The quotas caused prices of domestic met coke to jump almost immediately, which in turn may have nudged some old production units to restart, even as it raised alarms across the steel industry.

And that sets up an impasse: what’s good for steel makers is bad for coke makers.

Consider this: JSW Steel has its own coke production capacity, and it still relies heavily on imports for high-quality coke. In fact, when the Indian government imposed import quotas on met coke, JSW tried to get a $90 million shipment cleared. The court rejected it. That’s how critical imports are for them.

The other big name in steel, ArcelorMittal Nippon Steel, has taken it even further. The company imports almost all its met coke, and these import constraints are causing serious problems for it. In fact, they’ve warned that if supply doesn’t improve, they might have to shut down blast furnaces. That’s not just bad for them — it’s bad for India’s entire steel output.

Both companies have even gone to court to challenge the government’s import restrictions.

What Does This Investigation Mean for Different Players?

Here’s how things are likely to play out depending on what side you’re on:

• For domestic met coke producers: This is a win. If the investigation leads to duties, they get protection from cheap imports and may be able to run at full capacity again.
  

• For steelmakers: This could be painful. They're already struggling with cost pressures, and using lower-quality domestic coke might mean more furnace problems and lower yields. Production costs will go up.
  

• For traders: Commodity firms like Trafigura—which help import coke—are also affected. They too had shipments blocked under the new quota and went to court.

We'll keep tracking this as the investigation unfolds.

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Tidbits

1. India’s net GST collection for March 2025 stood at ₹1.76 lakh cr, marking a 7.3% year-on-year increase, higher than February’s ₹1.62 lakh cr. collection. Gross GST collections before refunds rose 9.9% YoY to ₹1.96 lakh cr. However, total refunds surged 41.2% YoY to ₹19 thousand cr. in March, driven largely by a 201.9% increase in import-related refunds.

2. Food delivery platform Zomato has laid off around 600 customer support staff within a year of hiring them under its Zomato Associate Accelerator Program (ZAAP). The layoffs come shortly after the launch of Nugget, an AI-powered, no-code customer support platform that now manages over 15 million customer interactions each month across Zomato, Blinkit, and Hyperpure.

3. Coal India Limited has announced a price hike of ₹10 per tonne on both coking and non-coking coal, effective April 16, 2025. The increase applies to regulated and non-regulated sectors and will be directed towards the Coal Mines Pension Scheme (CMPS), 1998.

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- This edition of the newsletter was written by Pranav and Krishna

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