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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
 those hiring one to ten
                                                                                             play a crucial role in
 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.
                                                                                           QUARTERLY JOURNAL OF ECONOMICS
 MAY 2022                                                                                               MAY 2022
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