NEW DELHI: In a departure from the existing norm for bolstering MSMEs (Micro, Small and Medium Enterprises), Chief Economic Advisor KV Subramanian asked the government to handhold new firms that will turn potential job creators rather than incentivising ‘small firms’. He also suggested putting a sunset clause for incentivising such firms.
The CEA dedicated a whole chapter titled ‘Nourishing Dwarfs to Become Giants: Reorienting Policies for MSME Growth’, in which he argued that policy incentives need to be provided to new firms rather than older MSMEs, else it acts as a disincentive for new firms to grow.
“Job creation in India suffers from policies that foster dwarfs, i.e., small firms that never grow; instead of infant firms that have the potential to grow and become giants rapidly,” the Survey said.
The Survey has categorised ‘small firms’ as those employing less than 100 workers. ‘Dwarfs’ were defined as small firms in operations for more than 10 years and ‘infants’ as newer companies that are small in size in terms of workforce.
The ‘dwarfs’ account for more than half of all organised firms in the manufacturing sector, but contribute only 14 per cent in employment generation and a “mere” 8 per cent to productivity, the Survey pointed out.
“In contrast, large firms (more than 100 employees) account for three-quarters of such employment and close to 90 per cent of productivity, despite accounting for about 15 per cent by number,” the Survey said.
Explaining the Economic Survey, Subramanian busted the myth that small firms are significant job creators as they also are responsible for job destructions, because they “find it difficult to sustain the jobs they create”.
While large firms create permanent jobs in large numbers, according to the Survey, young firms create more jobs at an increasing rate than older firms.
The Survey also argued that incentives create “perverse” encouragement for firms to stay small and advised that a ‘sunset’ clause be put in place for policy incentives for a period of five-to-seven years, beyond which a small firm “should be able to sustain itself.”