New Delhi: The Economic Survey 2018-19 presented on Thursday recommended incentivizing and handholding micro, small and medium enterprises (MSMEs) that are less than ten years of age, rather than providing benefits across the board.

The rationale for the change in strategy stems from the “perverse incentives for firms to remain significantly smaller in the Indian economic landscape," that has resulted in Indian firms not growing enough to create jobs and desired productivity in the economy.

This comes in the backdrop of a clutch of central ministries working on how to create jobs or an environment that will spur employment generation. In its second term, the Narendra Modi administration has set up two cabinet committees to prioritize and seek solutions to two critical issues: creating new jobs and boosting investments.

The Survey said, “restrictive labour regulations, which exempt small firms from such regulations, and other size-based incentives, which provide benefits to MSMEs irrespective of their age, have played a crucial role in providing perverse incentives for firms to remain significantly smaller in the Indian economic landscape," and recommended, focusing incentives on infant firms, i.e. firms less than ten years of age, with appropriate grandfathering of existing pattern of incentives to MSMEs.

Official data released on 31 May showed that Asia’s third-largest economy expanded at 6.8% in FY19, slower than the 7.2% in the previous year. It, however, had some silver linings—manufacturing output and construction activities expanded faster in the just concluded fiscal from a year earlier.

“Firms that are both small and older than ten years are categorized as dwarfs as these firms have continued to be stunted in their growth despite surviving for more than 10 years. While dwarfs account for half of all the firms in organized manufacturing by number, their share in employment is only 13.3%. In fact, their share in NVA (net value added) is a miniscule 4.7% despite them dominating half the economic landscape. In contrast, young, large firms (firms that have more than 100 employees and are not more than 10 years old) account for only 6.2% of firms by number but contribute a quarter of the employment and 38% of the NVA," the Survey said.

There are 63.38 million unincorporated non-farm MSMEs in the country engaged in different economic activities, including 19.66 million in manufacturing and 23 million in trade activities, according to data from the MSME ministry. The sector employs more than 49.77 million people.

“Thus, firms that are able to grow over time to become large are the biggest contributors to employment and productivity in the economy. In contrast, dwarfs that remain small despite becoming older remain the lowest contributors to employment and productivity in the economy," the Survey said.

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