Tuesday, Sep 23, 2014

The power of small

MSMEs have multiple labour laws to follow. They have to employ additional staff with financial and legal expertise to comply with them, which adds to their costs. MSMEs have multiple labour laws to follow. They have to employ additional staff with financial and legal expertise to comply with them, which adds to their costs.
Posted: May 27, 2014 12:15 am

It will be a challenge for the new government to find jobs for the young because of the continuing slowdown in the economy. This challenge is compounded by the prospects of a poor monsoon due to El Nino. If the monsoon fails, prices of agricultural and food commodities will increase, because of which interest rates will also continue to be kept high. As higher interest rates result in lower investment and slower growth, economic recovery to the 8 per cent-plus growth trajectory and employment generation will take a few years to materialise.

But the challenge is to immediately meet the employment needs of the millions of young people in India who dream of making it big. Micro, small and medium enterprises (MSMEs) have the potential to offer an easy and quick way out. After agriculture, MSMEs already account for a large segment of employment in the country. Additionally, they contribute significantly to industrial production and exports. The MSME sector provides employment to more than 60 million persons through 26 million enterprises, contributing about 8 per cent of the country’s GDP and 45 per cent of its manufactured output. Having said that, this sector still has large untapped potential for growth and for absorbing workers — both educated and illiterate, urban and rural.

The government has been making a concerted effort to help the MSME sector through organisational, financial, technological and marketing assistance. It has also been encouraging competitiveness through various innovative schemes, like incubators and tool rooms. Despite such efforts, the sector is riddled with inadequate market linkages, lack of infrastructure and managerial competence, obsolete technology and insufficient finance. Some of the other key problems are related to labour laws, taxation, market uncertainty, imperfect competition and the skill level of the workforce.

MSMEs form a heterogeneous group of industries. Technology requirements and the requisite management skills are different for each industry. Similarly, the requirement for capital and labour differ across industries, as do investment levels. MSMEs have multiple, stringent labour laws to follow. This implies they have to employ additional administrative staff with financial and legal expertise to comply with them, which adds to their costs.

Because of the stiff competition that MSMEs face, their profit margins are extremely thin. They are not assured of a regular supply of raw materials for production. And in view of the limited demand of a given unit, they are vulnerable to price fluctuations due to local factors like hoarding, among other things. The pool of labour from which MSMEs hire is also inadequately trained because the machines installed at government training institutes are obsolete. Because of their small size, the financial position continued…

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