Budget 2019: ‘Dwarf firms’ a drag on economy, says Economic Survey
The Survey argues that the existing regulatory framework has encouraged firms to remain small and inefficient (and producing sub-standard goods) through quotas (some products are reserved for MSMEs), labour laws, and priority sector lending norms.Updated: Jul 05, 2019, 10:36 IST
Almost half (46%) of the manufacturing firms in India are more than ten years old and employ less than 50 workers, the Economic Survey said, highlighting the problem of sub-scale companies, especially Micro, Small, and Medium Enterprises (MSMEs) that simply refuse to grow. They contribute only 5.6% of the total value added and have an employment share of just 8%. These figures are based on an analysis of the 2016-17 Annual Survey of Industries (ASI) database. The relative contribution of newer firms on such indicators is much better in the economy (See Chart).
The Survey argues that the existing regulatory framework has encouraged firms to remain small and inefficient (and producing sub-standard goods) through quotas (some products are reserved for MSMEs), labour laws, and priority sector lending norms.
The Survey calls for liberating the MSME sector with time bound incentives in order to propel smaller firms to grow fast, even as labour laws are eased .This will not only create higher profits for their promoters but also contribute to job creation and increasing productivity in the economy.
This is not the first time this problem has been pointed out. Many economists have described this problem as the missing middle in Indian industry, where firms are either too small or too large. Interestingly, the MSME sector played an important role in high economic growth in countries such as China.
It isn’t clear what needs to be done to address this issue, though.
For example, R Nagraj, professor of economics at Indira Gandhi Institute of Development Research has argued in a 2018 paper that the absence of robust MSME enterprises in India is more due to “the widespread and growing evasion of official registration, and under-reporting or misrepresentation in the administrative data” than “outcome of the rigid labour laws, adversely affecting productivity growth”.
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