Home / Opinion / Measuring Mudra’s success

In his recent interview to The Wall Street Journal, the prime minister said something very interesting about job creation. He said that his focus was to create a third sector—the personal sector—other than farms and factories wherein a person turns into a job provider through entrepreneurship rather than a job-seeker in the other two sectors. It is an important statement with policy implications for the next few years, if not longer. The government has already been active in translating his vision into reality.

The Pradhan Mantri Mudra Yojana (PMMY) is one of the cornerstones of this policy. There are three types of loans under PMMY: Shishu (up to 50,000), Kishore (from 50,001 to 5 lakh) and Tarun (from 500,001 to 10,00,000). Credit Suisse estimates that the total amount of loans disbursed under the PMMY programme crossed 1.25 trillion as of March 2016. Out of 32.7 million borrowers, 30.3 million borrowers were in the Shishu category.

As a percentage of banking sector exposure to the non-financial sectors of the economy, 1.25 trillion constitutes approximately 1.7%. These disbursements have been done in the space of less than a year. If such rates of growth were maintained, they would constitute a sizeable chunk of total non-farm credit in the economy. Therefore, given its importance to the future evolution of the economy, it is useful to have as precise an idea as possible, ex-ante, of the economic and social outcomes that the government is seeking with such generous credit support.

This is where the design and implementation of PMMY becomes critical. If the outcomes are all about the quantum of loans disbursed, then it is no better than a loan mela and no better than an entitlement. How does or how should the government measure the success of PMMY? To do that, one has to learn some hard truths about economic value added in MSME and in large enterprises.

Even within the organized sector, it is the larger units that are deploying the most capital, providing the most jobs, wages and emoluments and generating the most output. Statements 11 to 17 spread over Sections 7 to 10 of the Annual Survey of Industries (ASI) 2013-14 (Summary Results for Factory Sector) released only in end-April testify to this fact. Just one set of statistics should make us sit up and think about the policy implications: only 2% of the factories covered by the ASI generate net value-added (NVA) of over 50 crore. They employ a quarter of the total employed in factories, provide 40% of all emoluments; generate half the total output from factories and 71% of NVA. What it tells us is that there is an opportunity cost to resources allocated to generating micro and small entrepreneurship. Surely, they need to be encouraged but not to remain micro and small.

A chart from Chapter 2 of the IFC Jobs Study published in January 2013 (see here) would stop us from slipping into a self-congratulatory mode on these pro-entrepreneurship policies prematurely. As firms age, they employ more people. India is the exception. Even as firms become more than three decades old, they do not employ more people. If anything, employment size, relative to the size of employment at the birth of the firm, goes down! Forget about developed countries. Even Mexico does better than India. A large portion of this peculiar Indian feature has to do with the fact that firms remain small in nature. Perhaps, policy measures create a perverse incentive for them to remain small. The aim of policy must be to make them grow out of their sizes at birth.

An International Labour Organisation (ILO) statistical report from 2012 shows that India occupies the top ranks in terms of persons in informal employment or persons employed in the informal sector (as a percentage of total non-agricultural employment). It has Ivory Coast, Mali, Honduras, Madagascar and Bolivia keeping it company at the top. It is clear that informality is a feature of developing or underdeveloped economies.

Professor R. Vaidyanathan, in his seminal work India Uninc., notes that 90% of unincorporated non-agricultural enterprises did not maintain any sort of accounts. Apparently, the proportion was even higher at 94% for Own-Account Enterprises. Similarly, we should be worried when we learn that there are more than 4.5 million shops employing more than 3 million persons.

The government should measure the success (or failure) of its interventions by the extent of reduction in informal employment, the rise in formal employment and the extent of mobility of firms to medium and large sizes. Objective criteria will help in making these decisions in an apolitical fashion. For that, one of the conditions of the loans must be that entrepreneurs start to maintain books of accounts on employment, output, revenues, expenses and taxes.

With babies, infants and toddlers, we adore their small size. However, if they continue to remain small, as they turn into adolescents and adults, it is something to worry about. The Left and socialists romanticized and entrenched poverty in the name of the poor. Their counterparts on the Right should avoid committing the same error with micro and small enterprises.

V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.

Comments are welcome at baretalk@livemint.com. To read V. Anantha Nageswaran’s previous columns, go to livemint.com/baretalk

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