The power of small

MSME growth is the answer to the job crunch. But the sector needs a nudge

Updated: May 27, 2014 12:15:52 am
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.

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 of most MSMEs is weak and their financial buffer thin. Therefore, in the event of a financial crisis, they tend to become sick very soon. The government could consider instituting an emergency/ contingency fund or a line of credit for MSMEs.

There are a large number of MSMEs that are scattered across the country, because of which there is no nationwide association or federation to represent their interests, unlike the federations of large industries, which are successful in seeking political patronage. As the sector is highly heterogeneous, the government could consider encouraging region-cum-product specific associations to represent industry interests, preferably at the state level.

There is a need for the government and financial institutions to help MSMEs become financially literate and extend services that entrepreneurs can avail of. The government could consider an institutional mechanism to provide entrepreneurs with sound advice on the scope of business opportunities, based on a careful analysis of markets and projections in view of global trends. As with the agriculture sector, dedicated radio and TV programmes like Krishi Darshan could be broadcast for the benefit of MSMEs.

The MSME sector has great potential to help economic recovery and accelerate growth. In view of its significant capacity to create employment, the MSME sector deserves special attention. To incentivise MSMEs, the government could consider tax concessions or even tax holidays, which are offered by many countries. The government could also consider providing subsidies to MSMEs, including interest subsidies. Finally, to tap their employment generation potential, the problems of MSMEs need to be considered in a disaggregated manner. In fact, there is a need to make a clear distinction between manufacturing and service MSMEs, as these are two starkly different entities. Service sector MSMEs require less investment and could be prioritised to generate jobs in the immediate future. The model to extend finance to MSMEs needs to be examined and the self-help group route could be considered as an alternative to minimise losses. There is a need for the government to examine the exact problems faced by MSMEs and, after consultations with specific industrial associations, to help unleash their potential as engines of economic growth.

The writer is RBI Chair Professor of Economics,IIM Bangalore. Views are personal

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