It is hard to visualize the complex forces that turn the wheels of India’s economy when reading about the gas feud between the Ambani brothers, or the share price movement of the few thousand companies listed on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE)—stories of many successful entrepreneurs.
According to a recently released National Commission for Enterprises in the Unorganised Sector (NCEUS) report, India had a total labour force of 456 million in 2004-05. Of this, the informal agriculture sector accounted for 252 million workers, while the formal sector employed only 31 million workers—of which the private sector had 11 million, the rest coming from government and public sector undertakings (PSUs). This means that the bankers, chartered accountants, doctors, production managers and administrative assistants in our factories and companies form less than 2.5% of the country’s total labour force.
While the agriculture dominance of India’s labour story is well known (to the point of data ennui), what is less known is the break-up of employment in the non-agriculture part of our economy.
NCEUS data indicates that there are close to 32 million micro, small and medium enterprises (MSMEs) in the manufacturing and services sectors, employing a total of at least 58 million people. The fourth All India Census of MSMEs 2007-09 is almost complete, and will be released in a couple of months, offering much-needed granularity on the sector. Quick definitions: micro enterprises employ fewer than five people, with capital investment of less than Rs5 lakh. Small enterprises employ fewer than 10 people, and have capital investment of less than Rs25 lakh.
The MSME share of non-farm economic activity is astounding, with the sector accounting for close to 90% of all enterprises in India, close to 40% of manufacturing output and 90% of its employment, and one-third of our total exports.
This isn’t an emerging economy story, where the structure of our enterprises and labour market will change as we develop. Data from the World Bank’s MSME website shows that in 2004, the MSME sector in the US contributed to at least 50% of its employment, with the micro sector accounting for close to 80% of institutions.
There is one caveat: a large number of micro enterprises in India are “own-account enterprises”—that is, employer as sole employee. Manish Sabharwal of TeamLease says: “This is not a badge of India’s entrepreneurial instincts but our failure to create non-farm jobs.” NCEUS states, “It seems that the own-account workers take refuge in enterprise for want of alternative remunerative employment.”
Despite this, there’s no denying the continuing importance of MSMEs to India’s economy. However, the sector faces constraints on a number of fronts: access to capital, infrastructure and productivity tools, etc. Clearly, there’s a crying need not just for policy attention (which is beginning to happen), but greater public engagement as well.
The NCEUS report, for all its clarity on shining the light on the importance and challenges of the informal economy, is unfortunately searching for solutions from a limited ideological cupboard, suggesting for the most part increased state interventions and subsidies. Many of these are necessary, but we need to expand this solution set. Importantly, we need to debate the relevance of free markets for the MSME sector. If markets really add value, they cannot work only for the upper decile of our economy.
The mavens of free markets in India will have to be challenged to apply their minds and find answers that work for the MSME sector, not as appendices to policy reports, but as centrepieces. Anything less, and criticisms of blind faith in trickle-down ideas would be justified.
Importantly, this will also allow us to focus on the distinction between free markets and financial markets. Free markets are about the micro entrepreneurs who start off from the ground up, hiring two or three or 10 people, and growing from there. Most often, these entrepreneurs will never get to use the sophisticated tools of the financial markets—other than the typical loan from the neighbourhood bank. But that’s all they need, because they aren’t looking for more than their own risk-taking and hard work, and for the government to set fair and transparent rules of functioning, reduce red tape and provide the necessary social infrastructure.
We need to focus our attention on policy prescriptions that make it easier for our micro entrepreneurs to succeed, and dismantle the web of rules and regulations that often ends up choking them in a tangle of well-intentioned red tape.
The data on India’s labour market reinforces the universal rule—the true engines of an economy are entrepreneurs—big and small, but mostly small.
Ramesh Ramanathan is co-founder, Janaagraha. Möbius Strip, much like its mathematical origins, blurs boundaries. It is about the continuum between the state, market and our society. We welcome your comments at firstname.lastname@example.org