Why the MSME sector is dwarfish in the future?

The year 2021 was the one when TISS as well as FICCI published an article titled "Creating Udyog Sahayak Enterprises Network." According to the paper that the small and micro business sector has the potential to create one crore jobs in 5 years. However, there's one problem that needs to be addressed: that the MSE sector is affected by outdated and small firms that generate little to none jobs.
Despite the plethora of support efforts, including economic and relief packages and relief packages, relief and economic packages, the Indian MSME sector seems to be performing poorly. Are we down the wrong road with our reforms to MSMEs in India? Let's see.
Bird's Eye View of Indian MSME Sector
The MSME ecosystem in India is a stark example of extreme heterogeneity and fragmentation. India has more than 63 million small, micro, and medium-sized companies that provide products and services in many different industries. The 63 million companies are:
• 62 million enterprises are informal/unorganized, primarily micro and small enterprises.
• 40 million are single-worker companies
• 22 million businesses employ 2-5 employees
• 1 million employees between 5 and 10 workers
It is estimated that the MSME sector employs about 11 million workers in India which is most of them employed in small and micro companies. Additionally 51 percent of MSMEs in India are located in rural.
Dwarf and MSEs for infants: What's an actual difference?
Type of MSE Dwarf MSEs Infant MSEs
Age Older (more than 10 years old) Younger (less than 10 years old)
Number of Employees There are less than 100 employees There are less than 100 employees
Studies suggest that small businesses that are small as they age are the most insignificant factor in productivity and employment in the Indian economy.
The Bane of Dwarf MSMEs in India
A curse for dwarfs that is defined as businesses that do not grow beyond their initial size is a Indian MSME sector is afflicted by this curse that is defined as small-sized businesses that do not expand beyond their initial size. The MSEs create jobs and hinder effectiveness due to their limited expansion. They have continued to expand at a snail's speed after having survived for over 10 years.
This means that despite accounting for around 85percent of all businesses small businesses contribute little to the production of goods and employment. This means that the increase in job creation within small-sized enterprises will be followed by job losses and a consequent decrease in the net creation of jobs.
Additionally, research shows that the dwarf MSEs are low in productivity and lack value-added in the manufacturing industry. In comparison to dwarf companies infants have a higher the potential to grow into large businesses as they age, and have greater productivity and higher value added in the manufacturing industry.
Dwarf v/s Infant MSEs
The tiny MSEs however, on their own make up 50% of all organized manufacturing companies. They are surprisingly, only accounting for 13.3 percent of job creation and 4.7 percent of NVA. The smallest businesses, on contrary, are responsible for around 30% of the job production, that's considerably higher than the MSEs that dwarf them despite their small size. Naturally, as companies grow in India and job creation and productivity decline.
Additionally, while the younger MSEs are able to offer more potential to grow and grow, the vast majority of dwarfs don't have plans for this.
Does India's MSME Policy Promote Dwarfism?
The reason is straightforward small-scale businesses gain from the vast majority of government initiatives and economic plans. Smaller companies are often required to stay clear of reaching the threshold and expanding their operations because of these incentives. This makes it harder for MSEs to reap the benefits of economics of scale. Apart from gaining benefits through a myriad of projects, being a dwarf excludes people from the labour laws.
Additionally, there are labour laws and regulations like those pertaining to Industrial Disputes Act, the Trade Union Act, the Factory Act, the Minimum Wage Act and the Industrial Employment (Standing Orders) Act and many others offer exemptions dependent on the number employees. Since most companies with less hundred employees can be not subject to the law, they decide to stay small to enjoy the advantages.
A brief summary of the main motives that are causing Indian MSMEs to remain small include:
1. Specific schemes and incentives are available for small and micro-sized businesses.
2. Exemptions under the labor codes and other regulations.
3. The majority of the schemes put no age limit for benefiting from the benefits that encourage the MSMEs to remain small over the long term.
A Focus Shift Towards Infant MSEs
1. Use of Aadhar
Aadhar is the first option to use and foremost to stop use of the age criteria in a negative way. If a small-scale business has been using Aadhar benefits for more than ten years before closing to start the new business. The government should be warned against the deliberate dispersion and misuse of the programs when they are connected to Aadhar. There is an incentive to MSEs to leave the economies of scale or be small when age is a requirement for determining benefits. If a business realizes that being small doesn't offer them any benefit It's normal for them to concentrate in expanding their business and becoming bigger.
2. Introducing a Sunset Clause
The sunset clause is essential in many plans to stop the abuse of the no-age-bar criteria. This simply means that you must be able to claim the benefits for a period of 5-7 years following which the companies can sustain themselves.
3. Prioritize Startups and Infant MSEs
For instance under Priority Sector Lending Targets given to banks to provide loans to MSMEs could be changed to concentrate more on the young MSEs.
4. Focus on High Employment Flexible Sectors
In order to increase the impact of MSME industry to the GDP of developing countries, employment creating sectors should be more emphasized. Certain sectors that have high potential for employment growth and economic growth potential include:
• Metal and metal-based products that are fabricated or made
• Leather and textile goods
• Electronic products
• Goods made of plastic and rubber
5. Pay attention to sectors with a high Spillover Effect
The hospitality and tourism sectors are both fields which have a substantial job-creation and spillover effects. Travel agencies, hotels catering, road railways and air connectivity and also advertising tourism destinations, can all be enhanced.
In addition to these issues in it is also true that the Indian MSME sector is confronted with numerous other challenges. We've put together an exhaustive list of frequent problems, as for long-term solutions that work.


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