MSMEs Age. Don’t grow. They Need Holistic Support
The micro, small and medium enterprises (MSMEs) employ over 80 per cent of India’s workforce, contribute a third of India’s GDP and account for about 40 per cent of India’s exports.
However, the good news turns bad, even ugly from here. Less than two per cent grow at a pace that is higher than the inflation rate and even fewer outpace the GDP growth rate. Over 99.5 per cent of India’s seven crore MSMEs start micro and remain micro. Less than 5,000, i.e., about 0.007 per cent ‘graduate’ to medium ‒ literally, ‘lakho mein ek’!
Most small firms never grow to medium. Most medium firms don’t grow big. They treble every three decades and double the payroll number. Similar firms in other developed economies grow 12 times, employ eight times more. Decades later most end up with less than 50 employees if they survive. They not only remain small (but inevitably) inefficient, adding to their frailty.
Those unaware of the ecosystem would be forgiven for concluding that every effort is taken to keep them small.
The Crux study across 18 economically ‘progressive’ states, 6,000 SMEs, 500 policymakers and influencers articulates that the economic ecosystem has largely focused on the ‘creation and registration’ of the businesses. And the ecosystem has equally ‘restricted’ their growth, even ‘punished’ scale. Amongst the manufacturing ‘medium’ (50-250 people), productivity is about twice that of the ‘small’, and yet half of the larger firms. The long-term impact of productivity gap between the small and larger firms is less understood; and may amount to enhancing the GDP growth rate by 10 per cent.
*Regulatory, compliance framework: Loaded against the small, value depreciating
They are unfair, too elaborate, equally costly and value depreciating. Similarly, the poorly designed laws, unimplementable regulations, ‘torturous’ taxation regime, and energy sapping ‘inspections’ strengthen the blockades, deplete their will. Over 90 per cent of SMEs are incapacitated. The prevailing ecosystem and perpetuated by the state machinery is detrimental to their growth. Over 95 per cent of the ‘small’ amongst the segment, would ‘want to be somewhere else’, the study concludes.
The Crux study of the ecosystem has some ideas. The government must look holistically. Reforms must focus on enhancing the overall business environment, actively intervene, and demolish growth barriers. Support must be tailored. Ideas must be actionable and ‘packages’ implementable, for stimulus to yield better outcomes. The government must nourish and enable. And let go.
The reclassification of MSMEs on the basis of turnover and investment is a step in the right direction. It will encourage, also reward growth. It will reboot, even revive the sector. However bereft of holistic effort it will be one of the many revivals, and unsustainable. Reclassification metrics need some fixing, several nuts tightened.
Similarly, the PIL scheme in its present form will widen the chasm between the larger firms and the MSMEs. Several constituents of schemes need to be rationalised, many other need alignments. Schemes must be modified and ‘tailored’.
Policymakers often ignore the real issues. The focus must be on market facilitation, promoting ease of doing business.
The government has more impactful options. It must ‘collect’ GST on receipt of payments, not when ‘invoiced’. Liquidity is key to capitalising on the market opportunities. The MSMEs are the last to be paid by the clients, scurrying them to borrow at a higher cost. Lack of equity capital slows growth momentum, impedes investment in technology and restricts scale. The government must impose a framework, direct its institutions to prioritise MSME’s payments. The Crux study highlights that about 3.5 lakh crores are ‘stuck and meandering’ in files. This alone will increase the much-needed liquidity. It will importantly send the right signal.
Formalisation and the growth of the small and medium has the potential to catalyse the growth of the larger corporations, enhance competitiveness.
*Some economy-facing institutions lack capacity. Most are indifferent. Not ‘enablers’
Policymakers are so taken in by the idea of the MSMEs that ‘employ 11 crores’. The real issues get swept under the carpet. Other economic actors romanticise about the misplaced idea of MSMEs as job ‘creators’. Other institutions don’t help. They see the MSMEs as a ‘bridge’ to employment and overlook the several ‘fallouts’, namely, that employees are denied benefits, suffer job security and misery. Most accept ‘minimum’ wages.
Corporate India has a missing ‘middle’. It diminishes productivity and competitiveness, reduces value and hurts the economy. India must move beyond the ‘registration’ of MSMEs, focus on providing the necessary and customised impetus for optimal scale. Stimulus is generic, not customised; lumping dissimilar enterprises, clubbing unrelated industries, and geographies diminish impact. Larger and the top decile capture 80 per cent of the benefits of the stimulus. The smaller ones are left with crumbs.
The MSMEs, in their present form, can neither be the backbone, nor the engine for the $5 trillion GDP ambition. Size adds muscle, scale enhances productivity to move up the value chain and capitalise on the opportunities. They need to double their contribution to 15 per cent of the GDP to pierce the inflection point. Merely creating low-end jobs will not drive growth.
The government has a bigger role. It must incentivise investment, also co-invest in innovation, technology upgradation, capability-building, and fund networking opportunities to help high-potential entities grow. States lack financial resources and must select only the right potential firms through a robust, stringent methodology. The stimulus and support must be tailored to enable 2,000 mid-size firms to capitalise on growth and productivity-improvement opportunities. And emerge as ‘big’. Similarly, scale 10,000 to midsize.
*Unlocking growth in small & medium size entities
There are good examples. The Scale-up programme in Singapore, has created productive leaders amongst their small entities. Similarly, the Malaysian Mid-Tier Companies Development Programme (MTCDP) created export champions from their midsize firms. China’s model of industrial growth that launched ‘town and village enterprises (TVEs)’ transformed the rural hinterland into industrialised areas. India needs to modify and model this growth story.
A Crux decadal ‘scenario’ planning articulates that net employment would need to grow by 1.7 per cent per year for the next ten years. Productivity growth needs to enhance to seven per cent. Productivity and jobs are closely co-related; not contradictory. These numbers have been achieved; but not simultaneously. India needs both at tandem.
Economic growth creates jobs. Prosperity brings significant improvement in inclusivity, living standards and upward mobility. We do not want another ‘lost’ decade.
The author is a senior economist, columnist, author and a votary of inclusive development
