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The missing middle aggravates India’s jobs conundrum

Any country sees genuine progress when it creates jobs. This happens as small and mid-sized firms grow, and create jobs alongside. India, over the years, has faced the problem of the missing middle. There aren’t enough mid-sized firms operating in the country. Mint explores.

Any country sees genuine progress when it creates jobs. This happens as small and mid-sized firms grow, and create jobs alongside. India, over the years, has faced the problem of the missing middle. There aren’t enough mid-sized firms operating in the country. Mint explores.

How are job creation and firms’ size related?

McKinsey Global Institute (MGI) in a recent report titled India’s turning point—An economic agenda to spur growth and jobs points out that India has around 600 large firms which earn a revenue of more than $500 million per year. The labour productivity of these firms is 11 times higher than that of the overall economy. These firms are also responsible for 40% of exports and employ 20% of the people in the direct formal workforce. But there aren’t enough such firms going around. India has fewer large firms relative to gross domestic product (GDP) than China, Malaysia, South Korea and Thailand.

Why does India have fewer large firms?

In 2018, the revenues of large Indian firms amounted to 48% of nominal GDP. The contribution made by large firms in other emerging economies like China, Malaysia and Thailand was 1.5 to 1.6 times that of India. There aren’t enough large firms in India because of India’s missing middle of mid-sized firms. It’s the mid-sized firms which grow into large firms, and create jobs and competition along the way. As MGI points out: “India’s 1,500 mid-sized firms per $1 trillion of GDP, with revenue between $40 million and $500 million, are only about half the number in peer emerging economies relative to their GDP."

Chain reaction
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Chain reaction

Does slow corp growth have anything to do with this?

In 2012, the revenues of large firms in India amounted to around 58% of the GDP. By 2018, this fell to 48% of the GDP. This slow corporate growth led to slow economic growth and a situation where only 77 mid-sized firms became large between 2012 and 2018. In comparison, 93 mid-sized firms had become large firms between 2008 and 2012.

Why are the mid-sized firms unable to grow?

Largely, there are two reasons for it. The first one is India’s high cost of compliance. The small and mid-sized firms lack the “organizational resources to manage costly procedures... compared to larger firms", as highlighted by the MGI report. It takes 1,445 days to enforce a contract in India. In South Korea, it takes 290 days.

So, Indian firms don’t grow. Secondly, lack of access to low-cost capital stops firms from growing bigger. This problem can be tackled by deepening India’s capital markets.

What steps should be taken to tackle this?

India needs to triple the size of its large firms by 2030. This can happen if more than 1,000 mid-sized companies and 10,000 small companies are able to scale up, creating millions of jobs. This requires unlocking of land supply and allowing prices to fall by 20% to 25%, creation of flexible labour markets, privatizing the 30 largest PSU firms, efficient power distribution, improving ease of doing business and sector specific policies to improve productivity.

Vivek Kaul is the author of Bad Money.

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