Indian enterprises’ problem of scale

All Asian countries that have escaped the clutches of mass poverty have done so through a structural transformation in their labour force. China is the most recent example of a process that began with the rebuilding of Japan after 1945. People left farms for factories. However, millions of Indians continue to be trapped in a grey zone—they are turning their backs on traditional farm life but have been unable to get jobs in the organized modern sectors of the economy.

This grim fact is evident in the results of the sixth economic census, released by the government last week. They show that 131.29 million people were employed in 58.5 million establishments. That alone should give an idea about the tiny scale of operations in these enterprises.

Only a sliver of the Indian workforce outside of farming works in large enterprises. In fact, the average number of employees per enterprise has actually declined since the results of the previous economic census were released in 2005. Small is not necessarily beautiful in this case.

An economic census tracks enterprises in areas other than farming, public administration, defence, domestic servants, drivers and illegal activities. The number of such enterprises has gone up at a compound annual growth rate of 4.46% between 2005 and 2013, while the employment generated by these enterprises grew at 4.12% a year over the same period.

That these growth rates were seen even in the rural areas suggests that village economies are tentatively diversifying as men seek work in tiny enterprises while women are left to tend the farms.

These broad trends can be interpreted in two ways. One interpretation is that India is seeing a wonderful explosion of entrepreneurship. The other is that the lack of quality jobs in large enterprises is forcing families to eke out a living in tiny enterprises that cannot be scaled up. Think of it as distress entrepreneurship. Manish Sabharwal of hiring firm Teamlease often draws the important distinction between enterprises that are babies and those that are dwarfs. The former can be scaled up while the latter are condemned to remain tiny.

Policymakers will have to determine whether India has more babies or dwarfs. This is not easy to figure out, but it is an issue that has immense consequences for social stability. It is well known that around 12 million people enter the labour force every year. And it is quite evident that a substantial number of them are being absorbed by the tiny enterprises in the informal sector. The stellar work these enterprises have done in providing some work to millions is beyond doubt.

But it is not clear that they have the capital, scale, technology or market to provide decent incomes to those working within such enterprises.

The past few months have seen stray discussions about whether these tiny enterprises can be linked to the modern economy through technology —essentially doing what Uber has done in terms of providing jobs to drivers in our cities. They could also be helped through better access to formal finance, stronger protection for property rights and easier access to markets.

The structural transformation of the Indian economy continues to be incomplete. The informal sector has managed to act as a shock absorber by providing slim opportunities for the millions who have left the farm but not been hired in factories.

The most realistic option for the Indian government is to address the challenge on two fronts—continue to push reforms that will attract large investment projects while also lending support to micro enterprises.

This would be a contemporary, though less statist, variant of the strategy followed in the second five-year plan, when public investment in capital goods was meant to modernize the Indian economy, while cottage industries were to provide employment opportunities till industrialization was widespread enough to absorb excess labour from the agricultural sector.

Does India need more large or tiny enterprises? Tell us at views@livemint.com