There is widespread agreement that artificial intelligence (AI) represents a foundational change akin to electricity or the internet, which will reshape economies and societies for decades. For India, the challenge isn’t whether AI matters, but whether we can embed it deeply enough across our enterprises to accelerate growth and create a more inclusive economy.
While the global debate focuses on whether Artificial General Intelligence (AGI) is near and what its impact on humanity might be, India's concern is more immediate: can we utilise this transformative technology to boost productivity and raise the standard of living for millions at risk of staying trapped in low-income cycles?
Tech Adoption History in India
Large businesses in India have historically been quick to adopt technology, often ahead of global trends. Mid-sized businesses, especially in export-oriented sectors like automotive, have also embraced technology. However, much of the small and medium business landscape remains stuck in low-productivity cycles, bypassed by previous technological shifts such as ERP, CRM, and automation. Despite having one of the world’s most advanced digital payment ecosystems, many small Indian businesses still haven't embraced basic technological solutions like websites or digital tools.
India’s economy has been heading towards a K-shaped recovery since before Covid-19. At the top, large and some medium-sized firms compete globally, adopt technology, and push productivity. In contrast, a significant number of small and medium businesses remain trapped in a low-productivity cycle, surviving primarily by relying on cheap labour. This creates a stark divide: the few employed in larger businesses enjoy decent wages and growth, while most working in small businesses remain stuck in low-wage, low-growth roles.
Small Businesses as the Growth Engine
Small businesses are the backbone of any economy, creating jobs, expanding capacity, and providing the foundation for long-term growth. However, if small businesses remain locked in a low-productivity cycle, it will be impossible to break out of the 6–7% growth range and achieve the 10% growth needed for India to reach middle-income status. With India’s demographic advantage at risk, it is critical that we focus on improving the productivity of small businesses to drive sustained economic growth.
The inability of small businesses to raise productivity is not only their problem but a constraint on the entire economy. Small and medium-sized firms provide a large share of employment. When these firms remain stuck in low-productivity activities, wages stay low for much of the workforce. This affects the entire economy, as low wages at the bottom compress savings, reduce capital formation, and dampen consumption even as spending at the top continues to rise. Addressing the low-productivity, low-wage equilibrium at the bottom is key if India is to achieve sustained growth and close the income gap.
AI as a Productivity Lever
AI’s promise lies in its ability to boost productivity. It can automate routine tasks, assist with decision-making, reduce errors, and provide sophisticated capabilities through simple, language-based interfaces. AI isn’t just for large firms; even modest-sized businesses can use AI to draft documents, respond to customer queries, analyse data, manage inventory, and support compliance without needing large in-house teams. In this sense, AI could serve as a leveller, narrowing the productivity gap between small and large firms. If implemented effectively, AI could democratise access to productivity tools, benefiting small firms that don’t have large IT budgets.
The risk for India is not overinvestment in AI, but that the productivity gains from AI remain concentrated in large and digitally sophisticated mid-sized firms. This would replicate the pattern seen with earlier technological efforts like ERP and CRM, where benefits were mostly captured by large firms. While large businesses become more productive, competitive, and profitable, small and medium businesses may continue to rely on cheap labour, informal processes, and low margins. This would deepen the K-shaped economy, exacerbating inequality and undermining the sustainability of aggregate demand.
Bringing Small Businesses into the AI Agenda
The good news is that India is taking an active stance on AI development. Initiatives like the India AI programme aim to build core capabilities and extend AI tools for public services. So far, the focus has been on Indian language models and improving government service delivery. With a small shift in emphasis, the same resources could be used to improve the productivity of small businesses.
Two key elements would make a meaningful difference. First, AI tools relevant to small businesses should be incorporated into national AI programmes, including concrete applications for accounting, invoicing, compliance, HR, logistics, customer service, and basic analytics. Second, a public AI stack for small businesses, available at a nominal cost, should be developed, similar to India’s digital infrastructure for payments and identity. This would create a foundation on which vendors can build simple, affordable, interoperable solutions for small businesses.
The Path Forward
Aligning the AI agenda with the needs of small and medium businesses can make AI more than just a headline technology. By embedding AI in small businesses, we can raise productivity, wages, and savings where it matters most for long-term economic growth. The opportunity to do this at scale isn’t infinite, but with the right approach, India can use AI not only to modernise its most visible industries but also to lift the productivity of smaller enterprises.
If India acts with intent over the next 15–20 years, AI can play a crucial role in moving millions of small businesses out of the low-productivity trap and into a higher-productivity future, helping the country achieve its ambitious growth targets.
(Neeraj Mohan is the Managing Partner at Obsidian Advisors.)
Views are personal, and do not represent the stance of this publication.
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