Small isn’t beautiful for Indian workers. Grow the ‘Medium’ sector of MSMEs

By Arvind Panagariya

The good news in our fight against Covid-19 is that we are in a position to restore near normalcy to three-fourths of the districts. These districts have seen no or only a few cases of the disease. The bad news is that economic activity is located disproportionately in the remaining quarter of the districts. The timetable for opening up these districts is uncertain.

In the near term, there is added uncertainty of a second wave of infections. The Hong Kong Flu, which was the last big Covid-19 like pandemic, saw two successive waves in 1968-69 and 1969-70. It killed nearly a million people worldwide including 1,00,000 in the United States alone.

Prospects for a return to full normalcy in the entire country are far more certain in one to one and a half years. The process of bringing a vaccine against Covid-19 to the general population is proceeding at breakneck speed. Six vaccines have already entered human trials. The first of them, developed by Moderna Inc and backed by the US National Institutes of Health, began Phase 1 trials almost two months ago on March 3.

The latest one, developed at Jenner Institute of the University of Oxford, began human trial on April 23. Ambitiously, the team piloting this project says that it will be ready with one million doses of the vaccine as early as September. Accounting for approval process and mass production, we can reasonably expect to vaccinate a large proportion of the population in one and a half years, even sooner.

While the government must give priority to meeting the immediate challenges posed by Covid-19, it is also time to begin strategising for the longerterm economic transformation. As the saying goes, never let a crisis go to waste.

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One particular weakness that the current crisis has highlighted is the vulnerability of a very large proportion of Indian population to a disruption in economic activity. Too many Indians are unable to fend for themselves for even a few days if economic activity comes to a standstill.

Deep down, this vulnerability is rooted in the small size of economic units in nearly all sectors of the economy. In agriculture, 70 million or 48% of all land holdings are smaller than half hectare in size. The average size of these holdings is less than a quarter hectare. A family of five cannot survive on such a small farm even in normal times. A crisis devastates it.

A similar situation prevails outside of farm activity. According to Economic Census 2013-14, the latest available, 42 million or 72% of all enterprises in India are Own Account Enterprises (OAEs). OAEs do not employ a single hired worker on a regular basis. Therefore, all those working in OAEs are self-employed. The average value added in these enterprises is barely sufficient to give a family of five subsistence level of existence. In a crisis, the family must look to the government for survival.

Even as we go beyond OAEs, enterprises remain predominantly small. The Periodic Labour Force Survey (PLFS) found that only 9% of India’s workers are employed in enterprises with 20 or more workers. That leaves more than 400 million workers in either smaller enterprises or agriculture.

Even in normal times, banks do not loan to these small enterprises. It is simply not cost effective for them to assess creditworthiness of tens of millions of tiny enterprises and keep track of repayments. In April 2015, the government introduced Mudra loan scheme to fill the gap. By November 1 last year it had disbursed Rs 10.24 trillion to 208.4 million accounts. These disbursements work out to just Rs 49,136 per account. Such a small loan can at best help the recipient engage in subsistence level of economic activity, leaving her exposed to a crisis.

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For a large economy, India is unique in having such a large proportion of its workforce deployed in tiny economic units. Even small enterprises, which can have up to 50 workers, are overwhelmingly skewed towards those with fewer than ten workers each.

It is almost religion in India to champion the cause of MSMEs. Sadly, as we do so, we focus excessively on enterprises represented by the first M (Micro) in the acronym. Vast in number, these enterprises provide lots of employment but leave their owners hand to mouth in normal times and worse in a crisis.

In contrast, we pay no more than lip service to enterprises represented by the second M (Medium) in acronym MSME. Medium size enterprises, usually defined as those employing 50 to 200 workers, can be a great source of gainful employment. But they remain an endangered species in India. Most champions of MSMEs are unaware how few of them exist.

But it is these and larger enterprises that drive productivity growth in an economy. Even micro and small enterprises become more productive when they work side by side with medium and large enterprises. Creating a policy environment that can eventually move half of our workforce to medium and large enterprises would be the surest way to give the workers standing power against crises. If given an option, they would overwhelmingly choose gainful employment over government handouts.

(The writer is Professor of Economics at Columbia University)



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