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‘Grandfathering’ Incentives, Reducing ‘Dwarf Firms’: Economic Survey Roadmap for MSME Growth


Last Updated: July 04, 2019, 13:50 IST

‘Grandfathering’ Incentives, Reducing ‘Dwarf Firms’: Economic Survey Roadmap for MSME Growth

The Economic Survey says that compared to dwarf firms, young firms add more to employment and net value.

New Delhi: The Narendra Modi government 2.0’s first Economic Survey, tabled in Parliament on Thursday, focuses on enabling the growth of Micro, Small and Medium Enterprises (MSMEs) by “unshackling” them from the “policies followed over the last seven decades”.

The model of boosting MSMEs’ growth is based on Economic Survey 2018-19 prediction that the working age population of India will “grow by roughly 97 lakh per year during the coming decade and 42 lakh per year in the 2030s”.

To achieve growth, the survey aims to reduce the number of dwarf firms, which are defined as small firms of 100 or less workers that never grow beyond their small size. It dispels the common understanding that small firms generate most jobs.

“Firms that are both small and older than 10 years are categorised as dwarfs as these firms have continued to be stunted in their growth despite surviving for more than 10 years,” the Economic Survey 2018-19 stated.

While these dwarf firms account for half of all the firms in organised manufacturing by number, their share in employment is only 14.1 per cent, it added. The biggest contributors to employment and productivity are firms that are able to grow over time to become large.

Compared to dwarf firms, the survey says that young firms add more to employment and net value. “Firms less than 10 years of age account for about 30 per cent of employment and about half the Net Value Added (NVA),” it said.

Role of Policy in Fostering Dwarfism

The survey highlights the role of policy in protecting and fostering the growth of dwarf firms rather than infant firms.

Highlighting how policies create a “perverse” incentive for firms, the survey notes: “If the firms grow beyond the thresholds that these policies employ, then they will be unable to obtain the said benefits. Therefore, rather than grow the firm beyond the said threshold, entrepreneurs find it optimal to start a new firm to continue availing these benefits”.

Labour regulations that govern employer-employee relationship are one of the policies to come under scrutiny in the survey. It argues that the legislation on labour regulations exempt smaller firms from complying with legislation.

Citing the example of Rajasthan which introduced labour reforms in 2014-15, the survey presented a case were post reform number of firms with 100 or more employees grew at a significant rate.

The Union Budget 2019-20 is expected to introduce big chances to the labour regulations in the country.

The Economic Survey 2018-19 also highlights the need of small scale lending to MSMEs.

Roadmap for MSME Growth

A key point in the survey is the identification of dwarf firms that have low productivity and low value added in manufacturing by continuing to remain small despite aging.

The roadmap for MSME growth prioritises on shifting resources to infant firms by a “re-calibration of policy” towards supporting them.

As the first step, the survey recommends “grandfathering of existing incentives” and shifting them away from dwarf firms by using the Aadhaar.

“For instance, if a promoter starts a new firm, utilises the benefits for 10 years when the age-based policy is available and then closes the firm to start a new one to avail the age-based benefits through this new firm, then the Aadhaar of the promoter can alert authorities about this misuse,” the survey said.

The survey also recommends “re-orienting Priority Sector Lending (PSL)” targets by prioritising start-ups and infant firms in high employment elastic sectors. “This would enhance direct credit flow to sectors that can create the most jobs in the economy,” it states.

Recommendation has also been made to “focus on high employment elastic sectors”.

“The manufacture of rubber and plastic products, electronic and optical products, transport equipment, machinery, basic metals and fabricated metal products, chemicals and chemical products, textiles and leather & leather products, are the sub sectors with highest employment elasticities”.

Interestingly, MSME growth, the survey notes, can also be attained by focusing on service sectors like tourism. It recommends developing key tourist centres which will have a ripple effect on job creation.

“It is possible to identify 10 tourism spots in each of the larger 20 states and 5 spots in the nine smaller states and build road and air connectivity in these tourist attractions, which would boost economic activity along the entire route and would also reduce the migration of the rural labour force who form a major proportion of the total labour force,” the survey said.

first published:July 04, 2019, 13:43 IST
last updated:July 04, 2019, 13:50 IST