We Need Policy Action to Fix our Problem of the ‘Missing Middle’

Context: It will take reforms to catalyze the emergence and growth of mid-sized firms that have a vital role to play in India’s economy.

Significance of Mid-Sized Firms

• Capable of faster expansion in scale and scope:

• For E.g. In India, mid-sized firms are more than twice as productive as mid-sized firms and 11 times more productive than the average firm in the economy.

• Bring Economic Dynamism: through active participation in exports and generating employment opportunities:

• For E.g. They account for almost 40% of total exports and employ 20% of the direct formal workforce.

• Enhance competitiveness: The number of mid-sized and small firms and their upward mobility matters because it influences the degree of competitive pressure that large firms feel.

• The higher this pressure, the greater the share of efficient and high-performing firms at the top.

The Issue of “Missing Middle”: 

• Inadequate number of Large and Medium-Sized Firms in India – a comparison:

• India has fewer large firms relative to the size of its economy than many of its Asian peers.

• India has only about half as many mid-sized firms per trillion dollars of Gross Domestic Product (GDP) as peer economies.

• Low Revenue: at 48% of the nominal GDP has a scope to grow.

• In China, Malaysia and Thailand, the ratio of large firm revenue to GDP is about 1.5 times larger; in South Korea, it is 3.5 times larger.

• A pattern held across sectors:

• For, E.g. this ratio for retailers in peer economies is up to 13 times larger than in India, while for construction firms, the gap is 7 to 12 times.

• Factors Responsible: 

• The lack of adequate access to low-cost capital: acting as an impediment to growth.
• The high cost of doing business and complicated ecosystem: 

• For, E.g. enforcing a contract takes up to 1,450 days in India, more than triple the time than in China and South Korea.

• Small firms find it challenging to acquire real estate for expansion, obtain construction permits, and pay taxes

• Reduced Profitability of Firms: For, E.g. Since 2012, their profitability, as measured by return on assets, has also been falling

Way Forward: 

• Increase the number of Mid-sized firms: Tripling the number of large firms and enabling thousands of mid-size and small firms to climb the ladder of scale.

• This is vital, given the imperative for India to get back onto a high-growth track to create at least 90 million non-farm jobs by 2030.
• India needs to enable 1,000 or more small or mid-sized firms to scale up to large firms, and 10,000 or more small firms to scale up to mid-sized firms

• Deepen Capital Markets and Enable Efficient Financial Intermediation:

• The growth of mid-sized and small firms will require capital—about $800 billion in 2030, or six times the amount currently used.

• Lower the barriers: to and the cost of doing business.
• Ensure Stakeholders Involvement: Apart from the Central and the State governments, business leaders will need to play their part too.

• Raise aspirations: and commit themselves to a set of business opportunities at the frontier of productivity
• Develop a long-term value creation mindset: coupled with a strong performance-oriented culture.
• Develop a set of winning capabilities, including:

• Customer-centric innovation
• Operational Excellence
• Digitization and automation that boost efficiency
• Skills needed to execute mergers, acquisitions and partnerships to scale up
• Ability to build a strong trust-based brand to attract capital, customers and employees.

Conclusion: India’s entrepreneurs are one of the country’s strongest natural endowments. Now is the time to unleash their creativity and nimbleness.