The Economic Survey 2018-19 notes that the government's policies should focus on enabling the Micro, Small and Medium Enterprises (MSMEs) to grow by unshackling them. The Survey calls for incentivising 'infant' firms instead of 'dwarf' firms through various measures such as sunset clause and reorienting Priority Sector Lending (PSL).

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"MSMEs that grow not only create greater profits for their promoters but also contribute to job creation and productivity in the economy," the Survey noted.

Firms with less than 100 workers despite being 10 years old are defined as 'dwarf', those with more than 100 workers are 'large' while small firms that are small when they are young but can grow to become large firms have been defined as 'infant' by the Economic Survey.

According to the Survey, 'dwarfs' account for more than half of organised manufacturing firms in the sector but only contribute 14 percent to employment and 8 percent to productivity.

On the other hand, large firms account for more than 75 percent of employment and close to 90 percent of productivity, despite being 15 percent in number.

The data shows that the focus should shift to enabling MSMEs to grow, the Survey reasons.

The Survey draws a distinction between 'dwarf' firms and 'infant' firms in the MSME sector and emphasises providing incentives to 'infant' firms instead of 'dwarf' firms as the latter have continued to remain small despite ageing. They have low productivity and add very little to the manufacturing sector.

On the other hand, 'infant' firms are small firms when they are young but have potential to become 'large' as they age. They have high productivity and add high value in manufacturing.

The Survey said that 'dwarfs' consume vital resources that could possibly be given to 'infants', necessitating a "re-calibration of policy towards supporting infant firms".

The Survey proposes the following five measures to be adopted to this effect:

Incentivising 'infant' firms instead of small firms:

If incentives are given to all firms irrespective of age, firms are motivated to continue to stay small. This can be avoided when small firms know that they receive no benefit from staying small despite ageing, naturally activating their incentives for growth. Misuse of age-based criterion can be avoided using Aadhar. For instance, if a promoter starts a new firm, utilises the benefits for ten years when the age-based policy is available and then closes the firm to start a new one to avail the age-based benefits through this new firm, then the Aadhaar of the promoter can alert authorities about this misuse.

Reorienting PSL: Existing lending policy of banks incentivises firms to stay small. Under MSME's PSL targets, it is necessary to prioritize start-ups and infants in high employment elastic sectors. This will enhance direct credit flow to sectors that create maximum jobs in the economy.

Sunset clause for incentives: Every incentive for fostering growth should have a sunset clause such that the incentives cease to have effect after 5-7 years. This will create incentives for small firms to grow and would ensure that vital resources are only being provided to infant firms.

Focus on high employment elastic sectors: The manufacture of rubber and plastic products, electronic and optical products, transport equipment, machinery, basic metals and fabricated metal products, chemicals and chemical products, textiles and leather and leather products, are the sub-sectors with highest employment elasticities and policy focus should be on these sectors to ensure high job creation.

Focus on service sectors with high spillover effects such as tourism: Developing key tourist centres will have ripple effects on job creation in areas such as tour and safari guides, hotels, catering and housekeeping staff, shops at tourist spots etc. Tourist spots should be identified and developed and air and road connectivity should be built in these spots to boost economic activity.

First Published:Jul 4, 2019 1:42 PM IST