In 2021, TISS and FICCI published a paper titled “Creating Udyog Sahayak Enterprises Network.” According to the report, the micro and small business sector alone has the potential to produce one crore new jobs over the next five years. However, there is one issue: the MSE sector is plagued by small and outdated businesses that produce little to no jobs.
Despite a slew of supportive efforts, economic and relief packages, the Indian MSME sector appears to be underperforming. Are we walking on the wrong path with our MSMEs reforms in India? Let’s see.
Bird’s Eye View of Indian MSME Sector
The MSME ecosystem in India reflects extreme fragmentation and heterogeneity. India currently has over 63 million micro, small, and medium firms that provide goods and services across a wide range of industries. Among the 63 million businesses are:
- 62 million enterprises are informal/unorganized, primarily micro and small enterprises.
- 40 million are single worker firms
- 22 million enterprises employ 2-5 workers
- 1 million employees 5-10 workers
The MSME sector employs around 110 million people in India, 97% of which are employed in micro and small enterprises. Also, 51% of MSMEs in India are based in rural.
Dwarf v/s Infant MSEs: Where is the difference?
| Type of MSE | Dwarf MSEs | Infant MSEs |
| Age | Older (more than 10 years) | Younger (less than 10 years) |
| Number of Employees | Less than 100 employees | Less than 100 employees |
The studies suggest that dwarf enterprises that remain small even after becoming older are the lowest contributors to employment and productivity in the Indian economy.
The Bane of Dwarf MSMEs in India
The curse of dwarfs, which are defined as small firms that never develop beyond their original size, is a The Indian MSME sector suffers from the curse of dwarfs, which is described as small businesses that never grow beyond their original size. These MSEs hinder job creation and efficiency due to their restricted expansion. These businesses have continued to grow at a snail’s pace after having survived for more than ten years.
As a result, although accounting for roughly 85% of all enterprises, small businesses contribute very little to manufacturing output and employment. As a result, increased job creation in small enterprises is followed by job loss, resulting in decreased net job creation.
Also, studies show that dwarf MSEs possess low productivity levels and low value-added, especially in the manufacturing sector. As compared to dwarf enterprises, infants possess much more potential to become large firms with ageing, have high productivity and higher value-added in manufacturing.
Dwarf v/s Infant MSEs
The dwarf MSEs, on the other hand, account for half of all organised manufacturing businesses. Surprisingly, they only account for 13.3% of job creation and 4.7% of NVA. Infant businesses, on the other hand, account for roughly 30% of job creation, which is significantly more than dwarf MSEs despite their smaller size. Needless to say, as companies mature in India, both job creation and productivity tends to decline.
Furthermore, whereas the young MSEs have a great deal more potential to scale up and expand, most dwarfs have no such plans.
Does India’s MSME Policy Promote Dwarfism?
The rationale is simple: small businesses benefit from the majority of policy initiatives and economic packages. Small businesses are unwittingly forced to avoid crossing the threshold and expanding their operations as a result of such incentives. This makes it much more difficult for such MSEs to profit from economies of scale. In addition to receiving advantages through numerous projects, being dwarf exempts individuals from labour rules.
Here is a quick rundown of key policies that promote dwarfism in the Indian MSME sector:
| Government Scheme | Applicability |
| Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE) | Credit-guaranteed and collateral-free funds to micro and small enterprises (MSEs) from a Trust jointly established by the Ministry of MSME and Small Industries Development Bank of India (SIDBI). |
| Priority Sector Lending | Direct & indirect credit at lesser interest rates including all loans provided to micro and small enterprises, irrespective of age. |
| Price Preference Policy | A price preference of 15% premium given to small scale enterprises over the lowest quotation by large firms.
There is no bar on the age of small scale firms that can avail of the benefits. |
| Purchase Preference Policy | A particular group of items aka Group IV must be bought only from small scale enterprises, no matter what their age. |
| Raw Material Assistance Scheme of National Small Industries Corporation (NSIC) | Provide finances to MSMEs for purchasing of raw material, no age bar. |
| Exemption under Central Excise law | Small enterprises that manufacture SSI specified products and have a turnover of less than 4 crore can avail exemption under central excise law. Again, there is no bar on the age of the firm. |
Furthermore, labour laws and regulations such as the Industrial Disputes Act, the Trade Union Act, the Factory Act, the Minimum Wage Act, the Industrial Employment (Standing Orders) Act, and others provide exemptions based on the number of employees. Because most businesses with fewer than 100 employees are exempt from the laws, they choose to remain small in order to continue to reap the benefits.
Summarizing the key reasons forcing Indian MSMEs to stay small are:
- Targeted schemes and incentives for micro and small enterprises
- Exemptions under labor code and regulations.
- Most of the schemes impose no age bar on availing of the benefits incentivizing the MSMEs to stay dwarf in the long run.
A Focus Shift Towards Infant MSEs
1. Use of Aadhar
Aadhar should be utilised first and mainly to prevent the misuse of age criteria. If a small business has used the benefits for ten years or more and then closes to start a new business. The government can be warned about deliberate fragmentation and exploitation of the initiatives if they are linked to Aadhar. There will be no incentive for MSEs to escape economies of scale ecosystem and stay tiny if age becomes a criterion for benefits. When a company realises that staying small won’t bring them any benefits, it’s natural for them to focus their efforts on expanding their operations and becoming larger.
2. Introducing a Sunset Clause
The sunset clause has become important in most schemes to prevent the misuse of the no-age-bar criterion. It simply means requiring the advantages for a period of 5-7 years after which the businesses may self-sustain.
3. Prioritize Startups and Infant MSEs
For example, under Priority Sector Lending Targets given to banks for lending loans to MSMEs can be reframed to focus more on infant MSEs.
4. Focus on High Employment Flexible Sectors
To improve the economic contribution of the MSME sector to GDP, high employment generating sectors need to be given more attention. Some sectors with high employment generation and economic growth potential are:
- Metal and fabricated metal products
- Textile and leather goods
- Electronic products
- Rubber and plastic goods
Read also: https://smeventure.com/can-automation-transform-msme-sector-of-india/
5. Attention to Sectors with High Spillover Effect
Tourism and hospitality are two industries that have a significant job-creation spillover effect. Hotel chains, travel agencies, catering, road, rail, and air connectivity, as well as advertising tourism destinations, may all be improved.
Aside from these concerns, the Indian MSME sector faces a slew of other challenges. We’ve compiled a list of all the common problems, as well as long-term effective treatments.
Written by,
Prasad P. Patkar