TOO MANY AND TOO SMALL ECONOMIC UNITS CANNOT MAKE A LARGE ECONOMY

Historically, India was the largest economy in the world for most of the two millennia from the 1st until 19th century. India experienced de-industrialization and cessation of various craft industries under British rule, which along with fast economic and population growth in the Western World resulted in India's share of the world economy declining from 24.4% in 1700 to 4.2% in 1950, and its share of global industrial output declining from 25% in 1750 to 2% in 1900. Due to its ancient history as a trading zone and later its colonial status, colonial India remained economically integrated with the world, with high levels of trade, investment and migration.

 The Republic of India, founded in 1947, adopted central planning for most of its independent history, with extensive public ownership, regulation, red tape and trade barriers. After the 1991 economic crisis, the central government launched economic liberalization, allowing it to emerge as one of the world's fastest growing large economies. While agriculture remained the largest employer, MSMEs or Micro, Small and Medium Enterprises became the second largest employer with more than a million jobs created annually. There are 65 million enterprises in India but only 4 million are formally registered and so the informal segment which forms the bulk source of employment is unrecognized.

As if this alone was not big enough a problem, the composition of this MSME sector is most disadvantageous. About 42 million or 72% of all enterprises are microest of micro, the OAE or Own Account Enterprise which employs no one but the entrepreneur himself or herself. The average value created by these micro units can barely sustain a family if it can steer clear of any crisis. Even if we leave aside these OAEs only 9% of our work force is employed in units which have more than 20 workers! So medium, sized industries which employ 20 to 50 workers are very few and larger industries are fewer still. Our MSMEs are providing employment no doubt but they are not creating wealth and are leaving the workforce hand to mouth. Only when medium and large industries prosper can we solve the problem of unemployment and create assets by driving growth and productivity. 

A similar crisis prevails in the agriculture sector as well. We do not have large farms like there are in the western world. 70 million or 48% of our land holdings are less than half hectares and average land with a farmer is quarter hectare. How can a family sustain on the produce of such small farms? And if floods or droughts or hail storms strike they are ruined!

So, whether it is agriculture or it is MSMEs the individual units of economy are very small with little scope of employment and wealth generation. They are just keeping a major section of our population barely surviving and offering a hand to mouth existence. No wonder the incidence of mortality and reporting sick is also high among MSMEs as well as among farmers. They do not have deep pockets to withstand any stressful condition – draught, floods or lockdowns.

Now if majority of our MSMEs are micro in size how can they dare to dream big? Today they should be focusing their attention on technology adoption, access to finance and market access, for optimal results. There is a need to strengthen the entrepreneurial skills including their resource management ability and other soft skills such as analyzing market trend to respond to market changes, communication, problem solving and others. But they have neither the money and nor unfortunately the aspiration to do all that. To make things worse policies are often found to have incentivized firms to remain micro and small by giving them preferential treatments, subsidies. Thus, the potential to reap productivity through economies of scale from the expansion of firms is also often held back. So a micro industry never becomes small and small never graduates to medium and this unorganized sector suffers perennial stagnation.

So long as the major employers in the unorganized sector are small economic units that employ fewer than five workers we will neither create wealth nor employment. This important part of the economy is where a total of 69.5% of the employed workers in India are concentrated. Another 9.3% of workers are employed in firms between six to nine workers. So nearly 80% of these firms employ all workers of the unorganized/informal sector. The transition to the formality of informal economic units requires an understanding of the multiple causes and dimensions of informality in the private sector. An integrated approach is necessary to create the right environment with appropriate incentives and enforcement of regulations. Only in this way, it will be possible to enhance the creation of more employment and improving working conditions. As firms grow in size, they can achieve this growth potential. When the benefits of formality outweigh the costs, rates of informality are likely to decline.

This problem of small size of individual enterprises has been laid bare by the lockdown following the COVID 19 pandemic. It is estimated that at least 25-30% of the businesses would not survive the crisis.  The biggest worry is, of course, a liquidity crunch, followed by a disrupted supply chain and labour availability. MSME units usually have small premises. How will they adopt social distancing? The sector employs almost 12 crore people, making a large number of the country’s households dependent on the 63 million MSME units. It also accounts for a third of India’s manufacturing output and 45% of exports. The government not only needs to support this sector with an immediate help package but should make structural changes in its policies to incentivize them to grow in size and employ more people.

We cannot become a large economy if our individual units of economy do not increase in size. In agriculture these units are shrinking with every passing generation and MSMEs will have to spread, increase in number and size to absorb the spillover from agriculture.