Inject Blood into MSMEs

Context: Micro Small and Medium Enterprises (MSMEs) in India are in the dire need of up skilling and value addition and not just of unthoughtful government support.

Challenges to MSME in India

• Flawed Policy Landscape: which sympathizes with the small industries as being more egalitarian and disposes off big industries as being exploitative in nature.
• On the contrary, it is MSMEs that exist at subsistence-level productivity routinely flout environmental laws, social security laws and labour laws. 
• The size-based regulations applicable to MSMEs have been largely responsible for subsistence-level productivity
• Regulation of capital assets investment: to distinguish between the micro, small and medium industries, further disincentivises their scaling up.
• Low Per Capita Productivity: Average value added per worker for non-farm manufacturing enterprises was only 8% of the value added per worker for organised manufacturing. – The National Sample Survey Office (NSSO) survey of 2015-16.
• Low Total Factor Productivity (TFP): which refers to refers to growth in output that is not accounted for by land, labour or capital. It refers to growth in technology and knowledge.
• The KLEMS (capital, labour, energy, materials and service) database shows that growth in TFP in manufacturing sectors in the last two decades for the informal sector has been consistently below that of the formal sector.
• Low expenditure in R&D: Dominant form of innovation in the MSME sector is investing in new machineries rather than product innovation.
• With Zero Knowledge management, it survives merely because the humongous Indian economy continues favour such unproductive and inefficient enterprises.

Few Bright Spots:

• Pharma Sector: Where 9,456 MSME pharma units account for 87% production, and 40% value of total Indian pharma sector.
• Sectors with rising TFP: paper, rubber and plastics sectors.

Way Forward:

• Comparison with MSME in Germany: Productivity of SMEs in Germany remains very high even though the micro sector accounts for 83% of all SMEs there.
• Expenditure on research is high.
• Gross Value Added per employee for the micro sector in Germany is roughly 60% of the GVA for enterprises with more than 250 employees.

Conclusion: Government initiatives/benefits for MSMEs must not be at the cost of disincentivising their scaling up and legitimising their inefficiencies.