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Photo: Bloomberg
Photo: Bloomberg

The MSME sector holds the key to an Indian economic recovery

Fiscal support for MSMEs and a level playing field vis-a-vis big businesses would help our economy

Given the uncertainty of the pandemic and India’s economic recovery, all eyes are on estimates of growth in the second quarter of this fiscal year, to be released later this month. It is quite clear from the available data that the economy may have recovered from the trough of April and May, when the lockdown was in force, but is yet to show signs of a sustained recovery on an annual basis. Among the many indicators, perhaps the most significant is the decline in number of establishments registered with the Employees’ Provident Fund Organisation by more than 30,800 in October, compared to September. As reported by Mint, its enrolled number of workers also fell, by more than 1.8 million, during the same period. This was the first fall since May when the country was under lockdown.

These numbers needs to be taken seriously, not just as an indicator of the vulnerability of the employment situation, but also as a performance indicator of micro, small and medium enterprises (MSMEs). The MSME sector is vital for employment generation, as also for an economic recovery to sustain. The fiscal stimulus announced on 12 November included measures to boost employment in the MSME sector as part of the Atmanirbhar Rozgar Yojana, under which the government will bear the entire provident fund contributions for two years of all new employees hired. However, similar announcements earlier failed to enthuse the MSME sector.

Along with the employment incentive, the MSME sector has also been provided collateral free credit. But the offtake from the scheme has not been impressive, pointing to deeper issues. Part of the reason these incentives failed to have the desired impact lies in the very nature of the MSME sector and its heterogeneity, which is inherent in its definition as a residual sector once large enterprises are excluded. It comprises manufacturing but also a large part of services, which remain affected by the pandemic. Under the large umbrella of the sector are a variety of enterprises, ranging from single-person outfits to those with more than five workers. A 2015-16 survey of the National Statistical Office shows that almost 94% of these enterprises are tiny, with less than four workers, and about 62% are single-person businesses accounting for 78% of all workers in the sector. Only 31% are registered under various acts, but these face regulatory hurdles, some of them related to compliance with the goods and service tax (GST). The sector is India’s largest employer outside agriculture and construction, with 111 million workers. Therefore, it is crucial for any broad-based economic recovery, be it from the supply or demand side.

Despite the sector suffering the most from demonetization and GST implementation, it has shown resilience. The 2015-16 survey elicited information on the nature of problems faced by these enterprises. The two most important problems mentioned were a lack of demand and unpaid dues. On both, the situation after 2015-16 has worsened, with the economy slowing down and the government responsible for the largest unpaid dues. The pandemic has aggravated the problem. With the finances of state governments also strained, the fiscal situation has added to the problem of unpaid dues.

However, what has also hurt the sector is the political economy of state intervention, which seems biased in favour of large corporations. Unlike the 1.5 trillion tax bonanza that large companies received as part of a pre-pandemic stimulus, there was no such bounty for the MSME sector. Secondly, with most state governments relaxing labour regulations for large companies, even the low-wage advantage that this sector enjoyed has got diminished. Policy changes have not only reduced the compliance burden of labour laws, but have also helped large enterprises reduce wage costs. The latest wage costs data of the corporate sector confirms this. The net effect is that the MSME sector has to now compete with a corporate sector that has easy access to capital, cheap and unregulated labour and a lower tax burden than before.

Despite its importance, the MSME sector has been denied a level-playing field. It has to bear the brunt of policy-induced shocks, like demonetization and GST, as also natural shocks such as those caused by covid. Reviving the sector requires not just fiscal stimulus, but also a political-economy approach that prioritizes MSME interests. India needs to ease the regulatory burden of small units and aid their survival through fiscal support. Above all, they need a level-playing field vis-à-vis big businesses.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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