MSMEs: separating wheat from chaff
Do not look for easy interventions to help small-scale enterprises - carry out the reforms that will let them grow big
Abstract:
Realisation that the small-scale industries (SSI) reservation had failed to deliver on employment creation while impeding export growth led India to systematically roll back that policy beginning in 1997. While we have barely reached the tail end of the rollback with 20 items still remaining on the reservation list, the old view that small-scale enterprises are the silver bullet that will solve India's jobs problem has resurfaced. We are being advised to forget about labour law reforms and labour-intensive manufacturing in the organised sector and count instead on micro, small and medium enterprises (MSMEs) in the manufacturing sector for good jobs for the masses.
Possibly, these commentators feel exasperated by the hesitant response of large-scale firms to the removal of the SSI reservation. But the hesitant response is due to yet another layer of regulations embedded in Indian labour and exit laws. These regulations have continued to hold back entry of large-scale firms into labour-intensive sectors, such as apparel, footwear and electronic assembly. The apparel industry remains overwhelmingly populated by small, low-productivity firms with the result that much smaller Bangladesh and, recently, even tiny Vietnam have surpassed India as exporters of this product. Chinese apparel exports, of course, remain more than 10 times those of India.