Challenges for HR in MSME & SMEs in India (2021)

Written By Sakcham Tiwari

June 11, 2021
Due to a lack of resources and an underfunded HR management system, SMEs go through a lot of obstacles when it comes to staff management. This article will focus in detail on the challenges faced by SMEs and their causes.
challenges for HR

SMEs or Small-Medium Enterprises has grown to be a crucial sector for the development of the country. It has strengthened the country’s economic progress and international standing and has generated millions of jobs for the countrymen. Apart from this, it has promoted industrial development in rural areas and contributed to the production of a diverse range of products. 

The Ministry of SMEs states that the sector has contributed approximately 40% of the manufacturing output and contributes about 29% towards the GDP through its national and international trade. It is also responsible for creating more job opportunities both in rural and urban areas of India.

Due to such contributions to the country’s economic development, it is imperative that the SMEs receive constant support from the government so that they can reach their full potential. Some work also needs to be done on their internal structure, processes, and practices in order to keep up their growth. 

Let’s take a look at the challenges for HR in the SMEs sector:

Absence of a well-defined HR department in SMEs

A significant amount of challenges for HR that SMEs in India have to face can be traced to the lack of a suitable HR department. Confederation of Indian Industries conducted a survey which revealed that 20% of medium and 80% of small-sized enterprises are lacking well-defined HR departments in their workforce.This is a concerning issue and must be addressed by the government and the business community alike.

The reasons behind the lack of a well-defined HR department in SMEs in India can be many, the primary being the budget restrictions. Most of the small and medium-sized businesses do not have enough budget to afford an HR department. Maintaining a proper HR department is a highly expensive endeavour in the eyes of small business owners because they think they will have to pay handsome salaries to the department. 

Another reason contributing to the lack of a human resources department is that there are many SME owners who do not feel the need to have an HR department because their teams are too small for that. 

However, having an elaborate HR system from the starting stages of a business is extremely important to handle tasks such as talent acquisition, management, engagement, and creating policies related to remuneration and benefits of the employees. The presence of such a system has proven to increase the engagement and motivation level of the employees and consequently, the overall performance of the business. 

Challenges for HR in Talent management

Another huge challenge faced by HR in the SME sector is managing the talent due to the following factors:

challenges for HR


Finding and hiring the right ‘candidate’ has proven to be one of the biggest challenges for HR in small and medium-sized businesses. The talent pool for SMEs has always been quite lacking in enough qualified candidates that lead to inefficient hiring. 

This is so because most of the highly qualified candidates are attracted more towards the big organizations. The SMEs do not have the adequate budget for proper branding to attract the candidates to their job vacancies. Thus, HR managers are struggling a lot to find suitable talent for SMEs. 

The hiring process, overall, is also generally too expensive for a small and medium sized business.

Skill Training

It is crucial for organizations, especially small and medium-sized organizations to have a pool of skilled labour in order to succeed and grow their business exponentially. This requires proper induction and training. Due to the lack of digital support, SMEs are not able to perform proper induction and onboarding processes.

When it comes to training, large companies are taking the help of external experts to train and upskill their employees. SMEs, on the other hand, cannot afford external training for their employees. 

Therefore, the HR of SMEs have the tough challenge to effectively onboard and upskill the workforce without exceeding the budget.

Lack of policy for appraisal and feedback

In small and medium-sized businesses, structures such as competency framework, values, job descriptions for different roles are not that well defined. Due to this, performance appraisals are also not very structured or documented. 

The managers of SMEs are always busy with loads of work and are not trained to tackle performance evaluations. The main objectives of SMEs mostly include growth and scale and so, the process of assessments often gets ignored. 

Moreover, tracking employee performance is also lacking in SMEs. This makes it difficult for managers to distinguish between high-performing and low-performing employees.

The HR managers have to deal with these issues but they do not have the suitable resources for their proper handling.

Talent retention

A major issue for HR managers is the retention of employees in SMEs. The junior level of employees is highly in flux as they tend to move from one job to another frequently. This level generally consists of electricians or field sales people. HR faces a lot of difficulty in trying to retain such workers. Moreover, these workers tend to quit without prior notice, making it incredibly difficult for HR to fill out vacant positions. 

At middle and senior levels, the challenge is to keep the employees engaged. If these employees do not see many growth opportunities in the foreseeable future, they may lose interest in their job and think of quitting. Therefore, HR has to keep track and make sure that their engagement levels are maintained consistently. This requires coming up with ideas as to how the engagement of the employees can be increased, which is not an easy task.

Challenges for HR 2
Source : SHRM Report

Keeping up with the latest technology and innovation

Another issue that has emerged for HR in SMEs recently, is staying abreast with the latest technological advancements. Technology has continued to evolve rapidly in the last couple of decades and SMEs have struggled with that due to budgetary constraints. The responsibility falls on HR to incorporate as much of the necessary technology as possible in the company without breaking the budget. 

The employees also need to be made well-versed with the technology used in the company. This can be a challenge for HR when the employees are resistant to change and the HR then has to explain to them the need for the technology. Therefore, HR again has to work hard for the proper adoption of technology in the company.

Statutory and Labour Compliance

There are laws regarding hiring practices, wages, taxes, sick leave, and workplace safety. Staying abreast of these ever-changing laws and regulations can be a time-consuming task. Without a proper HR department, in charge of keeping track of changing laws and making sure they are complied with, SMEs often struggle with legal compliance making it one of the major challenges for HR. 

If they are not followed properly, it can lead to hefty fines and can be a hassle for the company. Paying these fines alone can drive a company out of business. Hence, it is essential for companies to comply with the laws in order to avoid this.


An effective HR management is necessary for the proper functioning of small and medium-sized enterprises. HR has to take care of innumerable responsibilities including recruitment, training, managing compliance with company policies, etc. Thus, effective HR management for SMEs is the need of the hour to overcome challenges for HR and the earlier the owners understand that, the better. 

An effective HR management is essential as it ensures that the company is recruiting and retaining the talent that is most suited for the company. This is how a business is led on the path of growth and development – through the efficiency of its workforce. 

Due to these reasons, Workex is here to help such firms overcome their challenges for HR and boost their development. We at Workex provide SMEs with many HR services such as staff management, payroll management and processing, attendance and leave tracking and management of statutory compliance. 

The only thing required from companies is that they onboard their employees to our online system. Then their employees can use our system for marking their attendance and leaves. The rest will be taken care of by us, from filing taxes to processing payroll. 

So, if you are an SME owner or manager and facing similar challenges as mentioned in this article, contact Workex and we will provide you assistance.

manage staff

Written by Sakcham Tiwari

Hi! I am a content writer and editor with a master's degree in Digital Publishing from Oxford Brookes University. I have worked for a myriad of websites, blogs, and digital magazines. When I am not writing/editing articles and content for clients, I am either immersed in books, or scribbling poems, watching Netflix, or just scrolling through Twitter.

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