GST and small enterprises

The zestful blogger that he is, Amol Agrawal had pointed to a very insightful interview of  the Secretary General of the Federation of Indian Micro, Small and Medium Enterprises (FISME) by Scroll.in. Worth going through the interview in full.

However, I have to add some caveats to this remark that Amol had made in his blog post:

Most of the articles dubs the SME sector as unorganised (which has come to mean corrupt of late) failing to realise that it forms 90% of economic activity in India (and other parts of the world as well). Most of our economic debates are for 10% of the Indian economy.

I had said this before but it is worth repeating:

6.34 crores of unincorporated non-agricultural enterprises generate GVA of 11.6 lakh crores. Just 190, 000 Factories generate the same amount of GVA (ASI, 2014-15). Incredibly, just 4% of 190,000 generate 60% of that GVA. Our problem is that we have far too many subsistence enterprises that generate far too little for the economy. They are not employment generators.

There is a social obligation not to leave them in the lurch. But, policy should provide the right motivation and environment for the capable, the motivated and skilled among them to grow bigger. The policy and regulatory environment is against firms becoming bigger.

Check out the NITI-Aayog report on the ‘Ease of doing business’ – an enterprise survey of Indian states. I have only read the Executive Summary and Chapter 1. I found this to be very important and I am glad someone had the guts to make the point that the report made:

Firms with more than 100 employees took significantly longer to get necessary approvals than smaller firms with less than 10 employees. Large firms were also more likely to complain that regulatory obstacles were a major impediment to doing business. They are also more likely to report incurring higher costs for getting necessary approvals.

The experiences and grievances of large firms indicate that it remains very hard for firms to scale up or grow in size. This could explain why firms in India are overwhelmingly small and remain small.

Chapter 1 has some excellent charts comparing India and China. The dominance of large enterprises in China actually helps workers in small and medium enterprises earn better wages:

In China, where large enterprises dominate, wages in medium and small enterprises are much higher than their counterparts in India. The gap between the two countries is particularly glaring in small enterprises. Whereas the wage in small enterprises in China is almost 60% of that in large enterprises, in India, it is only 20%. These figures actually underestimate the difference once we recognize that the real wages in large enterprises in China are significantly higher than those in India.

There is a difference between supporting existing big firms and encouraging smaller firms to grow bigger. Former is cronyism and the latter is economically efficient. I am calling for the second. India is perhaps doing the former and not the latter! At least, that is what the UPA government did. Perhaps, this government does neither!!

Further, there is also empirical literature that has documented the fact that seldom do firms start small and then go on to grow. They are uncommon.

I stress, while the State has an obligation to the small guy or lady entrepreneur (who are mostly one person enterprises), there needs to be no romanticism or illusion about their usefulness for generating the many million jobs that would need to be created.

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