Unlocking Growth: How MSMEs and IPOs Are Powering India's Future
Arnav Sharma
Micro, Small, and Medium Enterprises (MSMEs) have been and will remain pivotal in driving India’s economic growth and development. As of Q1 FY 2024-2025, MSMEs contribute over 8% of India’s GDP, accounting for 45% of manufacturing output, and representing 40% of exports, highlighting their significant presence in the economy. For instance, the Indian textile industry, largely driven by MSMEs, has made India of the largest textile exporters. In fact, the Knitwear Capital of India, Tiruppur, generates over $3 billion in exports annually: mostly due to MSMEs. As well as exports, MSMEs are key job creators, employing over 111 million people. This article thoroughly explores how MSMEs will play a key role in capital markets, particularly through growing initial public offerings (IPOs) and government initiatives.
MSME IPOs have become a crucial mechanism for small enterprises to grow, enabling them to raise funds through access to capital markets. Since 2023, over 120 MSME IPOs have been launched, raising approximately $650 million. These IPOs have benefited investors by allowing them to participate in the equity market while providing firms with the resources needed to expand. For instance, Rachna Infrastructure, an MSME in the construction industry, raised around $10 million through an IPO in 2023. The raised funds were used for the repayment of secured loans and to satisfy the working capital requirements, which was successfully achieved according to their annual report for 2022-2023. From the case of Rachna Infrastructure, it is quite clear how IPOs can significantly boost a company’s capital, enabling them to expand.
As these businesses grow, they contribute to job creation and expand their ability to produce varied goods and services, by virtue of capital reserves that lower opportunity costs (the cost of sacrificing the choice of producing the next best alternate) in production. On a macroeconomic scale, this job creation drives short-term growth considering the total output by the nation rises. Increased exports, firm investments, and higher consumer spending (as businesses can now produce more output due to the additional capital) fuel this growth. Simultaneously, MSMEs’ ability to invest in research and development, enhance productivity and operational efficiency, fuelling long term growth. Thus, there is a strong argument that MSME IPOs are closely tied to economic growth, due to the influx of capital and increased market participation by these enterprises.
Moreover, MSME IPOs promote diversification, with companies from various sectors opening up to the public market. Within 2023, IPOs were initiated from sectors ranging from healthcare (Trident Lifeline) and visual studio effects (Phantom Digital Effects). Diversification aligns with Indian Finance Minister Nirmala Sitharaman's vision that, in a fragmenting global economy, India should position itself as a key partner for countries looking to diversify their sources of goods and services. With diversification supporting exports, another priority of the Indian government, MSME IPOs will contribute to the broader goal of boosting economic activity. The cumulative effects of these IPOs can increase real output and generate employment, particularly increasing demand for skilled labor. This financial inclusion of MSME IPOs supports the broader economic goal of the Indian government: push toward becoming a $5 trillion economy. Therefore, supporting MSMEs in launching IPOs will be crucial for India to accelerate its economic growth and achieve its goals. With approximately 40 million MSMEs in India, many have yet to realize their full potential to contribute to the economy while benefiting from the capital and opportunities provided by IPOs.
To make the most out of IPOs and other objectives, MSMEs rely heavily on external support, particularly in accessing credit. That is where Non-Banking Financial Companies (NBFCs) play a crucial role in having MSME needs met as evidenced by them having the highest growth rate of 27.6% as of Q1 FY 2024-2025 among other microfinance institutions (MFIs), clearly indicating their importance for MSMEs. For example, Bajaj Finance, one of India’s largest NBFCs, has played a key role in providing MSMEs with quick and flexible loan options. In 2023, their MSME portfolio grew by 28%, enabling numerous small businesses to access much-needed working capital, expand their operations, and fuel further growth. Moreover, NBFCs also help MSMEs compete with international markets by providing access to export finance, trade credit, and forex solutions. This is evident from Drip Capital's decision to move away from traditional credit methods, a shift that, according to CEO Pushkar Mukewar, has "unlocked doors for MSME exporters that were previously firmly closed." This once again coincides with India’s aim to become an export hub.
Coupled with NBFCs, Public-Private Partnerships (PPPs) play a key role in enabling rapid growth of MSMEs. Government initiatives such as the Open Network for Digital Commerce (ONDC), aimed at decentralizing e-commerce, and the establishment of 20 new technology centers are key examples of how PPPs create a supportive ecosystem for MSMEs. PPPs have also extended financial support to MSMEs, for instance through the PMEGP (Prime Minister’s Employment Generation Programme) grants up to $30,000 for any project initiated by small enterprises. These grants have enabled the creation of nearly a million micro units and 8 million jobs alone, signifying the large scale impact of the programme.
Apart from direct support through PPPs, government initiatives have supported infrastructure development and implemented policies to foster MSME growth. For example, the Credit Linked Capital Subsidy Scheme (CLCSS) for MSMEs provides a subsidy of up to 15% for upgrading technology and enhancing competitiveness, which encouraged many small businesses to modernize and scale up their operations. With government subsidies, short-term growth occurs as aggregate demand increases, while simultaneously incentivizing MSMEs to invest in operational efficiency, which fuels long-term growth. Overall, it can be contended that appropriate support for MSMEs has not only driven economic growth through them but also encouraged the creation of new MSMEs. The emergence of these enterprises can, in turn, benefit from external support such as MFIs or PPPs, creating a positive feedback loop. This cycle of rising MSMEs boosting the economy, then incentivizes the creation of more MSMEs, ultimately bolstering long-term economic growth.
In conclusion, MSMEs will continue to be key drivers of India's economic aspirations. With the right combination of government support, innovative public-private partnerships, and increased IPO activity, MSMEs are well-positioned to increase their contribution to GDP, create jobs, and help India achieve its goal of becoming a $5 trillion economy and a global export powerhouse.