Economics Prelims cum Mains

Economic Survey: Attention on MSMEs, especially young firms, to create more jobs and raise productivity

Image result for msme
The News:

  • The Economic Survey 2018-19 has suggested various measures to create more jobs and raise productivity in the country.
  • It explicitly highlighted the need to stop certain incentives in the MSME sector that encourage the firms to remain small.

Theme: The topic discusses the various measures suggested by the recent Survey


Why the firms try to remain small?

  • As per the present policies, ‘dwarf’ firms (with less than 100 workers and more than 10 years old) get certain incentives which were brought in for the MSME sector.
  • These policies create a “perverse” incentive for firms to remain small. If the firms grow beyond the thresholds that these policies employ, then they will be unable to obtain the said benefits.
    • For example, labour legislations exempt ‘dwarf’ firms from requiring permission from the government before retrenching their employees.
    • Also, certain targets have been prescribed for banks for Priority Sector Lending (PSL) to the MSME sector that exacerbates perverse incentives to firms to remain small.
  • Therefore, rather than grow the firm beyond the said threshold, entrepreneurs find it optimal to start a new firm to continue availing these benefits.
  • The solution is to remove policies which create perverse incentives for firms to remain small.


Important Suggestions:

Prioritizing start-ups and infant firms

  • Focus should be on policies to unshackle micro, small and medium enterprises (MSMEs) to create more jobs and raise productivity.
  • Special focus should be on promoting young firms that have the potential to turn big rather than MSME firms which remain small.
  • Under MSME’s PSL targets, it is necessary to prioritise ‘start-ups’ and ‘infants’ in high employment-elastic sectors, it said.

Encourage the companies to grow in size for more employment:

  • Dwarf firms (with less than 100 workers and more than 10 years old) account for more than 50 per cent of all organised firms in manufacturing by number, but their contribution to employment is only 14 per cent and to productivity is a mere 8 per cent.
  • Whereas, large firms (more than 100 employees) account for 75 per cent employment and close to 90 per cent of productivity despite accounting for about 15 per cent by number.
  • Also, the young firms accounted for about 30% of employment and about 50% of net value added.
  • Therefore, the survey suggested perverse incentives (an incentive that creates an unplanned and unwanted result) targeting “dwarf” companies must be replaced with prioritising start-ups and “infant” firms.
  • All size-based incentives must have a sunset clause of less than ten years.

Deregulating Labour law restriction

  • The Survey suggested deregulating labour law restrictions to create more jobs.
  • The policy on labour regulations, both at central and state levels, was identified as a cause for perverse incentives on account of their high compliance costs.
  • The labour legislations which exempt firms with less than 100 employees to get permission from the government before retrenching their employees, incentivises a large majority of firms to prefer to be below the threshold of 100 employees.
  • Example:
  • The average number of firms with 100 employees or more was similar for Rajasthan and the rest of the country till 2014-15.
  • But, after the law change in Rajasthan in 2014-15, the number of firms with 100 employees or more increased at a significantly higher rate in Rajasthan than in the rest of the country.

Using Aadhar to promote age-based incentives to firms

  • Misuse of the age based criterion can be easily avoided using Aadhaar.
  • For example: if a promoter starts a new firm, utilizes the benefits for ten 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.


Suggestion for creating more employment in the economy

Focus on high employment elastic sectors

  • Focus should on high employment elastic sectors such as chemicals and chemical products, textiles and leather & leather products.
  • These is a need to enhance direct credit flow to these sectors as they can create the most jobs in the economy and service sectors like tourism.
  • Under MSME’s priority sector lending (PSL) targets, the survey necessitated to prioritise ‘start-ups’ and ‘infants’ in high employment-elastic sectors.

Promote Tourism

  • The focus also must be on service sectors such as tourism, which has high spillover effects on other sectors such as hotel & catering, transport, real estate, entertainment etc. Identifying and promoting tourist spots for development will help create jobs.
  • The Survey also suggested to identify 10 tourism spots in each of the larger 20 states and 5 spots in the 9 smaller states and build road and air connectivity in these tourist attractions.
  • This 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.

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