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Focus Story

        Scaling-Up                                            Combining                   micro-enterprises (defined as               Figure I: Distribution of Employment by Establishment Size  medium and larger firms) and   development policies can

                                                                                                                                                                                         between MSMEs and dynamic
                                                                                                                                                                                                                    play a crucial role in
                                                                                          those hiring one to ten
                                                              establishment-level data for
                                                                                                                                                                                                                    fostering such linkages.
                                                                                                                                                                                         markets. Effective cluster
                                                                                          workers) in total employment
                                                              the formal and informal
                                                                                          has declined by 8.5
                                                              manufacturing sector from
        MSMEs                                                 the Annual Survey of        percentage points, while that            45.0  44.8  41.8  36.8  36.3  22.6     26.0  30.3       EFFECTIVE CLUSTER
                                                                                          of large enterprises (i.e.,
                                                              Industries and the NSSO’s
                                                                                          those with 250 or more
                                                                                                                                                                                           DEVELOPMENT POLICIES
                                                              Enterprise Survey of
                                                                                          workers) has increased from
                                                                                                                                                                                           CAN PLAY A CRUCIAL
                                                              Unincorporated Enterprises
                                                              for the period between
                                                                                          30.3 per cent in 2015-16.  The
                                                                                                                                                                                           LINKAGES BETWEEN
                                                              2000-01 and 2015-16, I seek   20.5 per cent in 2000-01 to            20.0           21.7  20.6  17.2  12.8  14.0  16.3  16.1  20.5  21.8  ROLE IN FOSTERING
                                                              to answer this question in a   share of small enterprises            10.0                                                    MSMEs  AND DYNAMIC
                                                              recent study .              (i.e., those with 10 to 49               0.0                                                     MARKETS
                                                                                          workers) in total employment                 1 to 9 workers  10 to 49 workers  50 to 249 workers 250 or more workers
                                                              It is noted that the        has fallen from 21.6 per cent                        2000-01  2005-06  2010-11  2015-16
                                                                                          to 17.2 per cent over the
        H   istorically, India has   failure as the policy support   distribution of manufacturing   fifteen-year period while that
                                                              employment across firms of
                                   provided to these enterprises
            supported and
        encouraged micro, small and   has encouraged inefficient   different sizes in India is     of medium sized enterprises
                                                                                          (i.e., those with 50 to 249
        medium enterprises (MSMEs)   modes of production (in the   marked by a bi-modal   workers) has risen from 12.7         that for policies designed to   difficult and warrants more
        through various policy     name of employment         distribution wherein a large   per cent to 16 per cent.          support MSMEs to be          creative research and thought.
        initiatives by providing them   generation) and diverted   share of employment is                                      effective in employment
        with subsidized credit,    scarce resources from      concentrated in             The rising employment share          generation, they should seek   In addition to helping
        technical assistance, excise   productive investment.   micro-enterprises followed by   in medium and large            to identify the transformative   ‘constrained gazelles’ expand,
        tax exemptions and         However, it can be argued   large enterprises (Figure 1).   enterprises (from 33.3 per      enterprises, which have the   MSME policy support must
        preference in government   that in an economy such as   While the existence of a “U”   cent 46.4 per cent              potential to grow fast and   not (inadvertently) penalize
        procurement (Expert        India where there is a large   shaped (or bi-modal)    cumulatively over 15 years) in       provide them the necessary   medium and large sized firms
        Committee on MSMEs, RBI,   pool of surplus labour     distribution of manufacturing   total manufacturing              support to expand and        in an economy.  Further, it
        2019). The Small-Scale     (including household labour,   employment by enterprise   employment is a positive          graduate quickly up the size   should also avoid indefinitely
        Reservation Policy (1967),   whose opportunity cost is   size referred to as the   development as these                distribution. Successful policy   subsidizing subsistence
        which attempted to shield   close to zero) the promotion   “missing middle” is widely   enterprises offer more         support to micro and small   entrepreneurs i.e., those who
        small scale units from     of the decentralized methods   recognised in the literature,   productive and better paying   enterprises must be able to   are compelled to resort to
        competition by reserving the   of production may not only   this study finds that over time   jobs compared to smaller   target transformative      self-employment or own
        production of a number of   encourage greater use of   there has in fact been an   enterprises. Importantly, the       entrepreneurs and help them   account employment as a
        products for them for over   labour but also contribute to   improvement in the   improvement in the                   grow and not incentivize     survival mechanism to eke
        three decades stands out in   greater equity . Additionally,   employment distribution with   distribution of employment is   them to remain small.  Given   out a subsistence living.
        this context. In recent times   such policies promote   the share of medium and   seen not just at the aggregate       scarce resources, policy     OAMEs (i.e., those which
        too, the MSME sector has   entrepreneurship, lack of   large enterprises in total   level but also at a more           support must ensure that it is   operate without hired labour)
        continued to remain a thrust   which is often cited as a   employment rising while that   disaggregated state and      equipping transformative     have persistently accounted
        area for policymakers as it is   reason for inadequate   of small and             industry level.                      entrepreneurs with the tools   for 85 per cent of total
        believed that the sector is the   competition in industrial   micro-enterprises has been                               they need to succeed. As     enterprises in the enterprise
        ‘backbone of the Indian    markets.                              falling (Figure   Further, examining stylized         Jayachandran (2020) notes,   landscape suggesting that such
        industry’.                                                          1).  The      facts across firms of different      many of these enterprises,   subsistence enterprises are
                                   In this context, the                      share of                                          also referred to as          not transitioning to larger size
        Policies designed to support   question of whether it                             sizes and age cohorts, it            ‘constrained gazelles’ in the   categories and are unlikely to
                                                                                          appears that the shift in
        MSMEs have been widely     is in fact MSMEs or                                    distribution of employment           literature (defined as those   become engines of productive
        debated across developing   large firms that have                                 towards relatively larger            entrepreneurs who have a     job creation. The abundance
        countries. It is often argued   been significant                                  enterprises is driven, amongst       high empirical probability of   of subsistence entrepreneurs
        that in efficient markets,   contributors to                                      other factors, by the                being top-performers given   in fact reflects a failure of
        productive firms remain in   employment in India                                  expansion of some dynamic            their observable             medium and larger sized firms
        business and grow while    and whether their                                      MSMEs which are graduating           characteristics) are perhaps   to be more prevalent in the
        unproductive ones leave the   contributions have                                  and moving up the size               held back by policy-fixable   economy and generate a
        market.                    evolved over time                                      distribution.  An important          constraints, such as imperfect   larger fraction of jobs. Finally,
                                   merits greater                                                                              capital markets . However, the   MSME policy should also seek
        The predominance of a large   attention.                                          implication of the above is          task of identifying these high   to support and encourage
        number of old MSMEs is often                                                                                           growth firms from the factory   linkages between MSMEs and
        cited as evidence of market                           Dr. Radhicka Kapoor, Senior Visiting Fellow, Indian Council      level data available in India is   more dynamic firms (typically
                                                               for Research on International Economic Relations (ICRIER)
                                                1   Nagaraj,R (2018) “Of “Missing Middle” and Size-based Regulation A New Frontier in the Labour Market  3   Jayachandran.S (2020). “Microentrepreneurship in Developing Countries.” NBER Working Paper No. 26661, January 2020.
                                                  Flexibility Debate.” CSE Working Paper 2018-7, Centre for Sustainable Employment, Azim Premji University.
        08   ANALYSIS, RESEARCH, THOUGHT LEADERSHIP & ADVOCACY                                                                                                                                               ANALYSIS, RESEARCH, THOUGHT LEADERSHIP & ADVOCACY  09
                                                                                                                                                                                                                  QUARTERLY JOURNAL OF ECONOMICS
             MAY 2022                                                                                                                                                                                                          MAY 2022
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