MSMEs now have to think big for real growth
- The study has been authored by Radhicka Kapoor
The expansion of enterprise level datasets has led to the emergence of a large body of literature on patterns of employment and job dynamics across different enterprise types. Questions pertaining to where people are employed, what are the relative contributions of different enterprise types to employment and how these shares have evolved over time have attracted considerable interest. In this context, the role played by micro, small and medium enterprises (MSMEs) in employment generation and economic growth has been the subject of a large number of global studies.
Traditionally, India has supported and encouraged MSMEs as it is believed that these enterprises use labour-intensive methods of production, thereby generating the much needed employment opportunities outside the agriculture sector. Over the years, different policy initiatives have attempted to encourage MSMEs by providing subsidized credit, technical assistance, excise tax exemptions, and preference in government procurement. The Small Scale Reservation Policy (1967), which attempted to shield small scale units from competition and boost employment growth, by reserving production of number of items for these units, stands out in this context.
In recent times, too, the MSME sector has continued to remain a thrust area for policymakers as it is argued that these enterprises are the engines of job growth (Atma Nirbhar Bharat, 2020). Data from the Annual Report of the MSME ministry (2018-19) indicates that the sector employed 1,110 lakh persons, contributed to 29% of Gross Domestic Product (GDP) and more than 40% of India’s exports in 2015-16. While these figures are often used to argue that MSMEs are the ‘backbone of the Indian industry’, there is little systematic data or empirical evidence to understand how this sector has contributed to employment generation over time. In particular, the issue of whether it is in fact MSMEs or large firms that have been significant contributors to employment and how their respective contributions have evolved over time across states, industries and rural-urban areas merits greater attention.
This paper seeks to review the role of MSMEs in employment generation by examining key stylised facts and trends in the evolution of the enterprise size distribution in India for the time period between 2000-01 and 2015-16 using the two main available establishment databases, namely the Annual Survey of Industries and the NSSO’s Enterprise Survey of Unincorporated Enterprises. The structure of the paper is as follows. Section 2 describes the enterprise level datasets used in the analysis. Section 3 lays out the definition of MSMEs used in this study.
Between 1997 and 2007, 600 out of more than 1,000 items were de-reserved as it was argued that small enterprises making reserved products resisted growing or upgrading their technology as they would have to stop making those products if their investments grew beyond the permissible limits for small-scale industry.
Section 4 details the key stylized facts and finally Section 5 lays out the policy issues and challenges that emerge from the stylised facts. Combining establishment-level data from the registered/formal and informal/unincorporated manufacturing sector in India for the period between 2000-01 and 2015-16, we find that the enterprise landscape is dominated by micro-enterprises for the entire time period under study. The distribution of employment, on the other hand, has been marked by a bi-modal distribution wherein a large share of employment has been concentrated in micro-enterprises followed by large enterprises. Over time, there has been an improvement in the employment distribution with the share of medium and large enterprises in total employment rising, while that of small and micro-enterprises has been falling. The rising employment, both in shares and absolute terms, in the medium and large enterprises is a positive development as these enterprises offer higher wages compared to micro and small enterprises. What is more, the improvement in the distribution of employment is seen across both labour and capital intensive industries. At the state level, too, most states have witnessed this phenomenon. It is striking though that the shift in employment shares towards medium and large enterprises is particularly steep in rural areas compared to urban areas. The overall improvement in the employment distribution towards relatively larger enterprises appears to suggest that there are some dynamic MSMEs which are growing and moving up the size distribution. This suggests that for policies designed to support MSMEs to be effective in employment creation, they should seek to identify transformative enterprises which have the potential to grow fast and provide them the necessary support to expand and flourish. Policy support for MSMEs should not incentivise them to remain small and must also be cautious to avoid indefinitely subsidising subsistence entrepreneurs who are unlikely to be engines of productive job growth. The question of how we identify the dynamic transformative enterprises and what sets them apart from other enterprises is challenging given the data constraints and requires further research.
(The study has been authored by Radhicka Kapoor)