Why MSMEs Should Tap Energy Efficiency to Power Productivity

India’s micro, small, and medium enterprises (MSMEs), the backbone of the country’s economy, contribute nearly 30 per cent to the country’s gross domestic product (GDP), employing over 200 million Indians. These enterprises also account for more than 40 per cent of India’s exports.

However, the sector’s inefficient energy consumption presents a significant roadblock to realising its future growth potential, without compromising on the country’s climate commitments. It is here that MSMEs can play a pivotal role by relying on smart energy consumption to improve productivity.

Powering Productivity

India’s MSMEs collectively consume approximately 50 million tonnes of oil equivalent annually—about the same amount consumed by all of Argentina in 2020. This accounts for nearly a quarter of the industrial sector’s energy usage.

Yet, this massive energy consumption is not yielding proportionate productivity. According to the McKinsey Global Institute, Indian MSMEs are only 26 per cent as productive as large companies, compared to 29 per cent in other emerging economies.

This disparity underscores an unsettling truth: MSMEs are not consuming more energy because they produce more. They are consuming more because they produce less efficiently. The result is a cycle of high costs, low margins, and limited growth potential, which hampers both their economic contributions and their environmental impact.

Cycle of Inefficiency

According to a study by the Observer Research Foundation, energy costs represent 5–20 per cent of MSME operating expenses, significantly higher than the sub-2 per cent burden on larger firms. This inefficiency erodes profitability and restricts the financial flexibility of MSMEs to innovate, scale, and invest in modern energy-efficient technologies.

Caught in this cycle, MSMEs struggle to break free, as high operating costs preclude investments in equipment upgrades and sustainable practices. This dynamic not only limits their growth but also weakens their ability to compete globally in an increasingly environmentally-conscious marketplace.

Improving Global Competitiveness

In a globalised economy, environmental performance is a key factor determining competitiveness. Consumers, investors, and lenders are scrutinising the environmental footprints of firms—and not just from their own operations but also in their supply chains. MSMEs with inefficient energy practices therefore risk losing out to cleaner global competitors, both as suppliers to larger companies and as direct exporters.

Failing to address energy inefficiency could cost Indian MSMEs not only their domestic relevance but also their place in global markets that increasingly prioritise sustainability.

Eyeing Efficiency

While renewable energy adoption is gaining traction in India, a full transition will take time. Energy efficiency, however, offers an immediate and cost-effective solution. By optimising energy consumption, MSMEs can lower costs, reduce emissions, and enhance competitiveness.

Some initiatives, such as the proposed Assistance in Deploying Energy Efficient Technologies in Industries and Establishment (ADEETIE) scheme by the Ministry of Power, aim to address these challenges.

However, with a mooted outlay of Rs 1,000 crore such efforts are insufficient to bring about a systemic change. A comprehensive approach is thus the need of the hour—one that prioritises capacity building, access to affordable financing for technology upgrades, and the establishment of clear energy-efficiency benchmarks for MSMEs.

Collaboration between policymakers, industry leaders, and financial institutions can further act as a catalyst for transformation. Despite the policy push for tailored financial products, such as green loans or subsidies, by the Indian government, these still remain largely inaccessible for MSMEs. The reason being collateral requirements are beyond the means of most MSMEs. These funds, if unlocked, can empower MSMEs to invest in energy-efficient technologies.

Meanwhile, public-private partnerships can provide technical training and access to best practices, fostering a culture of efficiency and innovation throughout the sector.

Balancing Growth and Sustainability

Energy efficiency is not just about reducing energy consumption—it’s about unlocking the growth potential of MSMEs while supporting India’s decarbonisation goals. By addressing energy inefficiencies, MSMEs can reinvest savings into scaling operations, innovating products, and creating jobs—thus reinforcing their role as drivers of economic and environmental progress.

India’s vision of becoming a developed nation by 2047 and achieving net zero by 2070 hinges on the sustainable growth of its MSMEs. By prioritising energy efficiency, the sector can not only enhance its own resilience and competitiveness but also pave the way for a greener, more prosperous future for itself and its citizens.

(Ramnath Vaidyanathan is Associate Vice President and Head of Environmental Sustainability, Good & Green, Godrej Industries Group. Views expressed are personal.)