Economic Survey 2019: Incentivising Dwarf MSMEs To Grow Into Large Firms

‘Dwarf’ micro, small and medium-sized enterprises, that have less than 100 workers, need to be incentivised to grow into larger firms in order to help increase productivity, according to the Economic Survey 2018-19.

Policies over the last seven decades have stifled MSME growth in the economy and has kept these dwarf firms at the same size, the survey pointed out. Nearly half the micro, small and medium-sized enterprises have less than 100 workers and do not contribute much to India’s productivity compared to larger firms, it said.

These dwarf MSMEs contribute 8 percent to productivity and account for 14 percent of the employment, according to the economic survey, which was tabled in Parliament by Finance Minister Nirmala Sitharaman on Thursday.

In contrast, large firms with more than 100 employees account for 75 percent of the employment base and contribute close to 90 percent of the productivity, it said. Yet, large firms only make up 15 percent of the total number of enterprises in the country.

Policies must, therefore, focus on unshackling MSMEs, the survey said.

The survey, however, went on to argue that policies need to differentiate between ‘dwarf firms’ and ‘infant firms’. The latter may have greater potential to grow rapidly and hence should be a focus of policies.

Job creation in India “suffers from policies that foster dwarfs, i.e. small firms that never grow, instead of infant firms that have the potential to grow and become giants rapidly, it said. “Size-based incentives that are provided irrespective of firm age and inflexible labour regulation, which contain size-based limitations, contribute to this predicament.”

Krishnamurthy Subramanian, chief economic adviser, made a slew of recommendations for the MSME sector in his first Economic Survey. These include:

• Grandfathering of existing incentives should focus on infant firms and not dwarf firms. Through the use of Aadhaar, the age-based policies can be implemented to ensure removal of the perverse incentives.
• Reorienting priority sector lending guidelines to encourage MSME lending, with a priority to startups and infant firms in high employment elastic sectors.
• Sunset clause for incentives for a period of five to seven years after which the firm should be able to sustain itself.
• Focus on high employment elastic sectors such as manufacturing of plastic products, electronic and optical products, transport equipment, machinery, basic metals and fabricated metal products, chemicals and chemical products, textiles and leather and leather products.
• Focus on service sectors with high-spillover effects, particularly in tourism, through the identification of 10 spots in each of the larger 20 states and five spots in nine smaller states and build necessary road, air infrastructure. This will create a ripple effect for creating jobs and will boost the economic activity. It will also reduce the migration of the rural labour force, which forms a major proportion of the total labour force.