Economic Survey Chapter 03 – Free PDF Download

INTRODUCTION

• MSMEs that grow large not only create greater profits for their promoters but also contribute to job creation and productivity in the economy.
• India requires large no. of jobs in next few decades.
• Our policies must, therefore, focus on enabling MSMEs to grow by unshackling them.

WHAT’S MSME?

• According to the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 MSME are classified in two Classes:
• Manufacturing Enterprises
• Service Enterprises

DOMINATION OF ‘DWARFS’ IN NUMBER

• Dwarf firms mentioned here are defined as small firms that never grow beyond their small size, dominates the Indian economy and holds back job creation and productivity.
• Firms employing less than 100 workers- Small Firms.
• Firms employing more than 100 workers- Large Firms. (Indian context)
• Firms that are both small and older than ten years are categorized as dwarfs as these firms have continued to be stunted in their growth despite surviving for more than 10 years.
• While dwarfs account for half of all the firms in organized manufacturing by number, their share in employment is only 14.1%.
• In fact, their share in NVA is a miniscule 7.6% despite them dominating half the economic landscape.
• Large old firms account for only 10.2% of firms by number but contribute half of the employment as well as the NVA.
• Thus, firms that are able to grow over time to become large are the biggest contributors to employment and productivity in the economy.

ANALYSIS

• Findings in the previous slides dispel the common notion that small firms generate the most employment.
• Small firms may generate a higher number of new jobs. However, they destroy as many jobs as well.

CROSS-SECTIONAL COMPARISON (WITH OTHER COUNTRIES)

• The average employment level for 40-year old enterprises in the U.S. was more than seven times that of the employment when the enterprise is newly set up.
• In contrast, the average employment level for 40-year old firms in India was only 40 per cent greater than the employment when the enterprise is newly set up.
• Even Mexico does far better on this dimension than India.

POLICIES THAT LED TO DWARFISM

• Our policies protect and foster dwarfs rather than infants.
• The key distinction here is that while infant firms are small and young, dwarfs are small but old.

• These policies create a “perverse” incentive for firms to remain small.
• If the firms grow beyond the thresholds that these policies employ, then they will be unable to obtain the said benefits.
• Therefore, rather than grow the firm beyond the said threshold, entrepreneurs find it optimal to start a new firm to continue availing these benefits.
• These firms are unable to enjoy Economies of Scale & therefore remain unproductive. (Economies of Scale stem primarily from Firms size)

“INFLEXIBLE” VERSUS “FLEXIBLE” STATES

• Flexible states are those who are ready to bring labour reforms and vice-versa.
• No major labour reforms were initiated by the states from 2007 to 2014.
• In 2014, Rajasthan was the first State that introduced labour reforms in the major Acts.
• Thereafter many States followed on the path of Rajasthan.

• The above figure makes it amply clear that flexibility in labour laws creates a more conducive environment for growth of industry and employment generation.

FURTHER:-

• Due to rigidity in the labour laws, employers in Inflexible States prefer substituting labour with capital.

RAJASTHAN CASE STUDY IN LABOUR REFORM

• On average, plants in labour-intensive industries and in states that have transited towards more flexible labour markets, such as Uttar Pradesh or Gujarat, are 25.4 per cent more productive than their counterparts in states like West Bengal or Chhattisgarh.
• The major reforms undertaken by the State of Rajasthan included the amendments in IDA, 1947, Factories Act, 1948, The Contract Labour (Regulation & Abolition) Act, 1970 and the Apprentices Act, 1961.

EFFECT ON RAJASTHAN AFTER LABOUR REFORM

• In 2014-15, the average number of firms with 100 employees or more are similar for Rajasthan and the Rest of India.
• However, following the law change, the number of firms with 100 employees or more have increased at a significantly higher rate in Rajasthan than in the Rest of India.
• Hence the Figure clearly shows that the law change increased the number of larger firms.

• In last 2 figures, it can be clearly seen that, for all variables, CAGR (Compound Annual Growth Rates) post labour reforms in Rajasthan has increased significantly vis-à vis the Rest of India.

IMPACT DUE TO RESERVATION IN SMALL SCALE FIRMS

THE BELOW TABLE SHOWS, THE POLICIES PROMOTE SMALL FIRMS IRRESPECTIVE OF THEIR AGE

• The Small Scale Industries (SSI) reservation policy was introduced in 1967 to promote employment growth and income re-distribution.
• Given the predominance of dwarfs in the Indian economy and the low productivity and employment generation, as shown in the chapter, it is crucial to examine the role of the SSI reservation policy.

• The figure clearly shows that dwarfs, i.e., firms that are small and old, are significantly more likely to manufacture reserved products than any other category of firm.
• Also, larger firms (above 50 employees) and younger firms are significantly more likely to manufacture de-reserved products than smaller firms.
• Overall there is misallocation of resources due to SSI reservation policy.

REASONS FOR MISALLOCATION OF RESOURCES DUE TO SSI RESERVATION POLICY

• Four reasons:-
• First, SSI policies substantially lower the average Capital to Labour ratio when compared to the efficient level.
• Second, because of the lower capital accumulation, the overall demand for labour and the market wage rate are much lower due to SSI policies than the efficient level.
• Third, SSI policies result in inefficient allocation of managerial talent, which in turn affects productivity.
• Fourth, the inefficient allocation of resources results in price of manufactured products in restricted economy being too high, which then renders these products uncompetitive in a global economy.

WAY FORWARD

1. MSMEs that grow not only create greater profits for their promoters but also contribute to job creation and productivity in the economy. Our policies must, therefore, focus on enabling MSMEs to grow by unshackling them.

• While dwarfs consume vital resources that could possibly be given to infant firms, they contribute less to creation of jobs and economic growth as compared to infant firms.

2. Misuse of the age based criterion can be easily avoided using Aadhaar.

• For instance, if a promoter starts a new firm, utilizes the benefits for ten years when the age-based policy is available and then closes the firm to start a new one to avail the age-based benefits through this new firm, then the Aadhaar of the promoter can alert authorities about this misuse.

3. Under MSME’s Priority Sector Lending targets (7.5%), there is a need to prioritize ‘start ups’ and ‘infants’ in high employment elastic sectors.

• This would enhance direct credit flow to sectors that can create the most jobs in the economy.

4. Every incentive for fostering growth should have a ‘sunset’ clause,say, for a period of five to seven years after which the firm should be able to sustain itself.

5. Developing key tourist centres will have ripple effects on job creation in areas such as tour and safari guides, hotels, catering and housekeeping staff, shops at tourist spots etc.

• It is possible to identify 10 tourism spots in each of the larger 20 states and 5 spots in the 9 smaller states and build road and air connectivity in these tourist attractions.

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