Realisation that the small-scale industries (SSI) reservation had failed to deliver on employment creation while impeding export growth led India to systematically roll back that policy beginning in 1997. While we have barely reached the tail end of the rollback with 20 items still remaining on the reservation list, the old view that small-scale enterprises are the silver bullet that will solve India's jobs problem has resurfaced. We are being advised to forget about labour lawreforms and labour-intensive manufacturing in the organised sector and count instead on micro, small and medium enterprises (MSMEs) in the manufacturing sector for good jobs for the masses.
Possibly, these commentators feel exasperated by the hesitant response of large-scale firms to the removal of theSSI reservation. But the hesitant response is due to yet another layer of regulations embedded in Indian labour and exit laws. These regulations have continued to hold back entry of large-scale firms into labour-intensive sectors, such as apparel, footwear and electronic assembly. The apparel industry remains overwhelmingly populated by small, low-productivity firms with the result that much smaller Bangladesh and, recently, even tiny Vietnam have surpassed India as exporters of this product. Chinese apparel exports, of course, remain more than 10 times those of India.
While not all firms have to be large for a country to succeed in the global marketplace, a significant number of them do. Small and medium firms usually flourish in sectors in which large-scale firms are flourishing. The latter operate in the global marketplace, where they must compete against the super-efficient firms. The competition in turn forces them to constantly look for cost-cutting technologies and management practices and seek high-quality inputs at competitive prices. Small and medium firms within the sector must then shape up as well either because they must compete with the large ones directly or because they are their ancillaries.
In manufacturing, India officially defines micro-enterprises as those investing Rs 25 lakh ($40,000) or less in plant and machinery. Small manufacturing enterprises are those investing between Rs 25 lakh and Rs 5 crore and medium ones those with investments between Rs 5 crore and Rs 10 crore. The corresponding categories for services enterprises are defined by investments in equipment of less than Rs 10 lakh, Rs 10 lakh to Rs 2 crore and Rs 2 crore to Rs 5 crore.
These wide investment ranges imply that the MSMEs constitute a highly heterogeneous amalgam. A key fact is that the vast majority of them are tiny low-productivity firms whose owners are not capitalists in waiting. For most part, they generate barely sufficient income for their owners to get by and, with rare exceptions, lack the ability to create good jobs.
The MSME censuses reveal that 95 per cent of all the MSMEs are micro-enterprises. With less than Rs 25 lakh invested in machinery and equipment, these enterprises serve local markets within a few kilometres of their location. Little is known of the quantity and quality of their output, or of their sales profiles since they are not registered even with district industry centres.
At the other extreme, few reform sceptics are even aware that many small and medium firms bear the full brunt of our pernicious labour and exit laws. According to ongoing research of economists Rana Hasan and Nidhi Kapoor of the Asian Development Bank, 10 per cent of the organised sector manufacturing enterprises officially defined as small employed 164 or more workers each in 2010-11. Among medium enterprises, 50 per cent employed more than 128 workers each in the same year. These enterprises must naturally comply with the full range of labour and exit laws principally aimed at large corporations.
Mr Hasan and Ms Kapoor also find that firms with less than 20 workers each employed 73 per cent of all manufacturing workers but produced just 12 per cent of the total economy-wide manufacturing output in 2010-11. That is to say, 27 per cent of all manufacturing workers in firms with 20 or more workers produced a staggering 88 per cent of the total manufacturing output. Well-paid jobs are concentrated in these overwhelmingly organised sector firms.
Findings from the Employment and Unemployment Survey of 2011-12 confirm this inference. According to it, workers in firms with less than 20 employees are paid Rs 1,581 a week on average. This wage is just a third higher than the modest Tendulkar poverty line for a family of five, confirming that the vast majority of the small firms lack the wherewithal to create well-paid jobs. In contrast, manufacturing firms with 20 or more employees pay a wage more than twice the poverty line.
A key reason why small firms remain stuck at low productivity and, therefore, low wages is that they are too small to take advantage of modern technologies. In apparel, for example, Mr Hasan's and Ms Kapoor's ongoing work cites a variety of machines and tools available for pre-sewing, sewing and post-sewing operations. The costs of these machines are for the most part out of reach of the smaller firms. But the harsh reality is that these machines are essential for the manufacture of high-quality apparel in sufficient volume for just-in-time delivery that buyers in the global marketplace demand.
It is all too seductive to think that there are easy interventions that would turn micro-enterprises into manufacturing dynamos. The reality, however, is that 50 years worth of interventions on their behalf have not produced any tangible results. Each time we want to intervene yet another time, we tell ourselves that it will be different this time. But, alas, we unwittingly end up encouraging small firms to stay small and unproductive.
Support to the MSMEs should be about incentivising them to grow larger and competitive in the global marketplace. It should not be turned into yet another social programme that perpetuates weak and inefficient enterprises. If good jobs are what we seek, it is a folly of the first order to lean against the Schumpeterian process of creative destruction. At the end of the day, we will need flexible labour and exit laws for the success of not just large firms but small and medium ones as well
Possibly, these commentators feel exasperated by the hesitant response of large-scale firms to the removal of theSSI reservation. But the hesitant response is due to yet another layer of regulations embedded in Indian labour and exit laws. These regulations have continued to hold back entry of large-scale firms into labour-intensive sectors, such as apparel, footwear and electronic assembly. The apparel industry remains overwhelmingly populated by small, low-productivity firms with the result that much smaller Bangladesh and, recently, even tiny Vietnam have surpassed India as exporters of this product. Chinese apparel exports, of course, remain more than 10 times those of India.
While not all firms have to be large for a country to succeed in the global marketplace, a significant number of them do. Small and medium firms usually flourish in sectors in which large-scale firms are flourishing. The latter operate in the global marketplace, where they must compete against the super-efficient firms. The competition in turn forces them to constantly look for cost-cutting technologies and management practices and seek high-quality inputs at competitive prices. Small and medium firms within the sector must then shape up as well either because they must compete with the large ones directly or because they are their ancillaries.
In manufacturing, India officially defines micro-enterprises as those investing Rs 25 lakh ($40,000) or less in plant and machinery. Small manufacturing enterprises are those investing between Rs 25 lakh and Rs 5 crore and medium ones those with investments between Rs 5 crore and Rs 10 crore. The corresponding categories for services enterprises are defined by investments in equipment of less than Rs 10 lakh, Rs 10 lakh to Rs 2 crore and Rs 2 crore to Rs 5 crore.
These wide investment ranges imply that the MSMEs constitute a highly heterogeneous amalgam. A key fact is that the vast majority of them are tiny low-productivity firms whose owners are not capitalists in waiting. For most part, they generate barely sufficient income for their owners to get by and, with rare exceptions, lack the ability to create good jobs.
The MSME censuses reveal that 95 per cent of all the MSMEs are micro-enterprises. With less than Rs 25 lakh invested in machinery and equipment, these enterprises serve local markets within a few kilometres of their location. Little is known of the quantity and quality of their output, or of their sales profiles since they are not registered even with district industry centres.
At the other extreme, few reform sceptics are even aware that many small and medium firms bear the full brunt of our pernicious labour and exit laws. According to ongoing research of economists Rana Hasan and Nidhi Kapoor of the Asian Development Bank, 10 per cent of the organised sector manufacturing enterprises officially defined as small employed 164 or more workers each in 2010-11. Among medium enterprises, 50 per cent employed more than 128 workers each in the same year. These enterprises must naturally comply with the full range of labour and exit laws principally aimed at large corporations.
Mr Hasan and Ms Kapoor also find that firms with less than 20 workers each employed 73 per cent of all manufacturing workers but produced just 12 per cent of the total economy-wide manufacturing output in 2010-11. That is to say, 27 per cent of all manufacturing workers in firms with 20 or more workers produced a staggering 88 per cent of the total manufacturing output. Well-paid jobs are concentrated in these overwhelmingly organised sector firms.
Findings from the Employment and Unemployment Survey of 2011-12 confirm this inference. According to it, workers in firms with less than 20 employees are paid Rs 1,581 a week on average. This wage is just a third higher than the modest Tendulkar poverty line for a family of five, confirming that the vast majority of the small firms lack the wherewithal to create well-paid jobs. In contrast, manufacturing firms with 20 or more employees pay a wage more than twice the poverty line.
A key reason why small firms remain stuck at low productivity and, therefore, low wages is that they are too small to take advantage of modern technologies. In apparel, for example, Mr Hasan's and Ms Kapoor's ongoing work cites a variety of machines and tools available for pre-sewing, sewing and post-sewing operations. The costs of these machines are for the most part out of reach of the smaller firms. But the harsh reality is that these machines are essential for the manufacture of high-quality apparel in sufficient volume for just-in-time delivery that buyers in the global marketplace demand.
It is all too seductive to think that there are easy interventions that would turn micro-enterprises into manufacturing dynamos. The reality, however, is that 50 years worth of interventions on their behalf have not produced any tangible results. Each time we want to intervene yet another time, we tell ourselves that it will be different this time. But, alas, we unwittingly end up encouraging small firms to stay small and unproductive.
Support to the MSMEs should be about incentivising them to grow larger and competitive in the global marketplace. It should not be turned into yet another social programme that perpetuates weak and inefficient enterprises. If good jobs are what we seek, it is a folly of the first order to lean against the Schumpeterian process of creative destruction. At the end of the day, we will need flexible labour and exit laws for the success of not just large firms but small and medium ones as well
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