20 May 2024 : Indian Express Editorial Analysis

1. THE CURSE OF SMALLNESS

Topic: GS2 – Governance – Government policies – Interventions for development in various sectors GS3 – Indian economy – Issues relating to mobilization of resources

Context:

The recent directive mandating timely payments to Micro, Small, and Medium Enterprises (MSMEs) has exposed significant knowledge gaps concerning the structure and operational dynamics of these businesses. Although the order aims to support MSMEs, its immediate effects have inadvertently marginalized smaller enterprises. This situation underscores the need for a comprehensive understanding of the diverse entities within the MSME sector.

Revising Definitions and Recognizing Diversity:

• In 2020, the definition of micro-enterprises was broadened to include firms with an annual turnover of up to Rs 5 crore, up from the previous limit of Rs 50 lakh. This change was intended to prevent firms from underreporting revenues to qualify for state incentives.
• However, this new definition obscures significant disparities within the micro-enterprise category.
• According to the National Sample Survey Organisation (NSSO) Unorganised Enterprise Survey 2016, 95% of enterprises reported revenues under Rs 50 lakh, and a substantial 89% earned less than Rs 12 lakh annually.
• Similar trends are observed in the Annual Survey of Industries (ASI), where 66% of enterprises earned less than Rs 50 lakh, and 45% earned under Rs 12 lakh annually.
• Thus, while over 98% of MSMEs are micro-enterprises, a vast majority of these earn significantly less than the new threshold of Rs 5 crore.

The Skewed Distribution of Revenues:

• The skewed distribution of revenues within the micro-enterprise segment is evident across various datasets.
• In the NSSO survey, only 2% of firms reported revenues above Rs 50 lakh per annum, and in the ASI, about 30% of enterprises reported revenues above this threshold.
• Even among the more formal enterprises captured in the Prowess dataset, only 40% of those in the under Rs 5 crore category reported revenues below Rs 50 lakh in 2016.
• Regardless of the data source, measures of central tendency—mean, median, and mode—cluster at the lower end of the revenue spectrum within the micro category, highlighting a pronounced rightward skewness.

Borrowing Patterns and Financial Dynamics:

• The borrowing patterns of micro-enterprises further illustrate the heterogeneity within this category.
• According to the 2016 NSSO survey, less than 20% of enterprises with revenues under Rs 50 lakh borrowed capital, compared to twice as many in the Rs 50 lakh to Rs 5 crore range.
• The median borrowings for the lower revenue group were about Rs 0.57 crore annually, whereas for the higher revenue group, the median borrowings were about Rs 8 crore.
• These figures indicate significant differences in financial operations and access to capital within the micro-enterprise category.

Worker Formality and Enterprise Size:

• The formality of employment within MSMEs is closely linked to enterprise size and revenue.
• Smaller enterprises with annual revenues below Rs 12 lakh typically employ one formal worker for every nine informal workers.
• This ratio improves in larger micro-enterprises, where those with revenues between Rs 50 lakh and Rs 1 crore employ one formal worker for every two informal workers.
• This disparity in worker formality highlights the challenges faced by smaller enterprises in providing formal employment, which is often overlooked in broader policy discussions.

Need for Systematic Data and Policy Interventions:

• The current lack of detailed, systematic data on MSMEs, particularly those not registered under the Factories Act, hampers effective policy-making.
• The Udyam registration data classifies enterprises without revealing their annual revenues, further complicating the understanding of this sector.
• However, GST data from 2022 supports the observed revenue distribution trends, with 63% of firms reporting revenues under Rs 50 lakh and 30% under Rs 10 lakh annually.
• These data points reinforce the need for regular and detailed revisions of MSME definitions to ensure they accurately reflect the sector’s realities.

Conclusion:

• A weakened understanding of the MSME sector, especially the largest category of micro-enterprises, undermines the design of effective interventions.
• Reviewing and refining the categorization within the micro-enterprise segment is essential to address the opacity created by new definitions and the paucity of systematic data.
• Policymakers must ensure that policies are grounded in a nuanced understanding of the diverse financial and operational realities of MSMEs to foster their growth and sustainability effectively.

What is the Significance of MSME Sector for India?

Boon for Rural Development: Compared with large-scale companies, MSMEs aided in the industrialisation of rural areas at minimal capital cost. The sector has made significant contributions to the country’s rural socio-economic growth and complemented major industries as well. Front Runner in Make in India Mission: As India aims that the products that are ‘Make in India’ are also ‘Made for the World,’ adhering to global standards of quality. MSME is acquiring the centre stage in the mission. It is taken as a backbone in making this dream a possibility. Simple Management Structure for Enterprises: Considering India’s middle-class economy, MSME offers a flexibility that it can start with limited resources within the control of the owner. From this decision making gets easy and efficient. On the contrary, a large corporation requires a specialist for every departmental functioning as it has a complex organisational structure. Economic Growth and Leverage Exports: It is the most significant driver in India contributing to the tune of 8% to GDP. Nowadays, Multi National Companies are buying semi-finished, and auxiliary products from small enterprises. It offers immense potential in creating a linkage between India’s MSME base and big companies.

PYQ: What is/are the recent policy initiative(s)of Government of India to promote the growth of the manufacturing sector? (2012) 1) Setting up of National Investment and Manufacturing Zones 2) Providing the benefit of ‘single window clearance’ 3) Establishing the Technology Acquisition and Development Fund Select the correct answer using the codes given below: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 Ans: (d)

Practice Question:  Discuss the challenges faced by Micro, Small, and Medium Enterprises (MSMEs) in India and suggest measures to address them. (250 words/15 m)

2. House is the key

Topic: GS2 – Governance – Government policies – Interventions for development in various sectors GS3 – Indian Economy – Issues relating to growth

Context:

India’s ambition to grow its economy to $10 trillion by 2035 and increase the manufacturing sector’s share from 15% to 25% of GDP is a bold vision. This transformation aims to enhance employment elasticity, meaning more jobs per unit of output, which necessitates a fourfold growth in manufacturing. The post-COVID landscape presents a unique opportunity, especially with China facing its own challenges, prompting the Indian government to aggressively promote initiatives like Production Linked Incentives (PLIs) and Make in India.

The Overlooked Narrative: Labour Empowerment:

• Despite the focus on capital and land, the real potential for unlocking India’s manufacturing prowess lies in empowering the workforce.
• Workers, often seen as mere cogs in the industrial machinery, represent a critical factor of production.
• The empowerment of this workforce through safe, on-premises accommodation could address several issues related to productivity, skill development, and employee retention.

Current Challenges with Workforce Logistics:

• Currently, most factories source their workforce from ad hoc accommodations in cities and peripheral areas, leading to significant challenges.
• A study of select factories around Bengaluru showed that workers often travel up to two hours each way, costing over Rs 5,000 per worker per month and leaving them exhausted before their shifts begin.
• This arrangement is neither cost-effective nor conducive to high productivity.

Learning from Global Examples:

• Other countries have addressed the issue of worker accommodation in various ways.
• China’s mega-factories, like Foxconn in Guangzhou with dormitories for over 300,000 workers, highlight the importance of scale, though such models need adaptation to fit democratic contexts like India.
• South Korea’s stringent labor laws and worker-friendly policies offer a more suitable parallel.
• Historically, India has seen successful models in both public and private sectors, such as the housing and community initiatives by Tata Steel in Jamshedpur.

Policy Implications and Recommendations:

1. Land Allocation and Industrial Regulations:

• Land allotment policies must expand to include workers’ accommodation. This requires state-level regulatory adjustments to allow flexibility in operating arrangements for this infrastructure, whether built by state governments, private companies, or specialized institutions.

2. Role of the Union Government:

• The Union government should catalyze this infrastructure by offering tax incentives, GST reductions, and other fiscal incentives for investments in workers’ accommodation. Priority sector tagging for construction finance and collaborative financing through entities like the National Investment and Infrastructure Fund (NIIF) could further support credible projects.

3. Private Sector Leadership:

• Private sector entities must take the lead in establishing top-notch workers’ accommodation. Economic factors such as reduced transportation expenses, improved productivity, better training facilities, lower attrition rates, and a reduced carbon footprint will drive this enlightened self-interest.

Conclusion:

• The proverb “Chhoti chabi bada tala khol sakti hai” aptly captures the essence of how addressing workers’ accommodation can unlock India’s manufacturing ambitions.
• It is crucial to incorporate this into the 100-day plans for new government initiatives, ensuring that the collaborative efforts of the Centre, state, and private sector firms can drive significant and sustainable growth in India’s manufacturing sector.

What are the Challenges Related to India’s Manufacturing Sector?

Inadequate Tech Based Infrastructure: Technology-based infrastructure, especially for communication, transportation, and skilled manpower are important for enhancing manufacturing competitiveness. Telecom communication facilities are mainly confined to big cities. Most of the State Electricity Boards are running in loss and are in deplorable condition. Access to Credit for MSME: The Micro, Small and Medium-sized enterprises (MSME) sector appears to have less favorable access to credit and higher costs for working capital compared to medium and large-scale industrial and service sectors. Skilled Labour Shortages: There is a lack of trained and skilled labor in the manufacturing sector in India, which limits the growth of the sector. Complex Regulations and Poor Supply Chain: The manufacturing sector in India is subject to a number of complex regulations like license, tender, audit, which can be a burden for businesses and hinder their growth. Also, the sector is often plagued by poor supply chain management, which can lead to inefficiencies and increased costs. Competition from Other Countries and Imports: India’s manufacturing sector faces intense competition from other countries, which can make it difficult for domestic businesses to compete on the global market. Also, India is still dependent on foreign imports for transport equipment, machinery (electrical and non-electrical), iron and steel, paper, chemicals and fertilizers, plastic material etc

Practice Question:  Discuss the role of workforce accommodation in transforming India’s manufacturing sector and outline the policy measures required to support this initiative. (250 words/15 m)