Nourishing Dwarfs to Become Giants: Reorienting Policies for MSME Growth

1. Nourishing Dwarfs to Become Giants:
Reorienting Policies for MSME Growth
CA. Divakar Vijayasarathy
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com

2. Credits and Acknowledgments
Viswanath D

3. Presentation Schema
Introduction Terminologies
The Bane of Dwarfism and its
Impact on Jobs and
Productivity
Cross Country Comparison Need of Policies Role of Policies

4. Introduction
Job creation is imperative for financial and social inclusion of young population.
Survey predicts that working age population will grow by 97 lakhs per year
If labour force participation rate (LFPR) remains at 60%, 55 lakhs to 60 lakhs new jobs will have to
be created.
MSME’s creates great profits, job creation and productivity in economy which has the capacity
for creation of new jobs.
This chapter lays down policy that fosters growth of MSME.

5. Terminologies
Particulars Name for the context
Firms with less than 100 workers Small Firms
Firms with more than 100 workers Large firms
Firms with less than 100 workers but older than 10
years
Dwarfs
Firms that are small when they are young but can
grow to become large firms as they age
Infants

6. The Bane of Dwarfism and its Impact on Jobs and
Productivity
• Domination of Dwarfs in number
Particulars Dwarfs Large and old firms Young and large
firms
Percentage of total
firms
50% (Approx) 10.2% 5.5%
Share of
employment
14.1% 50% (Approx) 21.2%
Contribution to net
Value added
7.6% 50% (Approx) 37.2%
• Thus, firms that are able to grow over time to become large are the biggest contributors to
employment and productivity in the economy.
• In contrast, dwarfs that remain small despite becoming older remain the lowest contributors to
employment and productivity in the economy.

7. Effect compared to size
From the above statistics it could be observed that young firms contribute significantly to employment and
value added. As the age increases, there is a gradual decrease in employment and value added.

8. Cross Country Comparison
The table below compares employment and productivity of 40 year old firm with that of a new firm among 3
countries
Thus, the comparison with other countries highlights that both employment creation and productivity do not
grow adequately as firms age in India.
Hence there is a need for development of adequate policies for to foster growth of firms India by adoption of
various effective policies.
Particulars Employment Productivity
USA 7 times more than new firm 2.5 times more than new firm
Mexico 2 times than new firm 1.7 times than New firm
India 0.4 times than new firm 0.6 times more than new firm

9. Need of Policies
Policies create a conducive environment for growth of industry and
employment creation.
Young firms can be classified Dwarfs and Infants.
Infants can grow and become large firms that are not only productive but
also produce large employment.
Dwarfs remain small and contribute neither to productivity nor to jobs.
This necessitates recalibration of policy towards supporting infant firms.

10. Flexibility of Labour regulations
• The labor regulations have been made flexible in some state and the results are much better than those
states with flexible regulations. This should continue.
Sunset Clause for Incentives
• When incentives are provided to small firms, there is no motivation to make the firm large
• After a span of time once the incentives are extinguished they close the existing small firm and start a new
firm to avail the benefits.
• As a result there is no economies of scale, hence they are unproductive and there are no further
employment generation.
• Once small firms know that they would receive no benefit from continuing to remain small despite aging,
their natural incentives to grow would get activated.
• This further creates growth and employment.
• After appropriate grandfathering, every incentive for fostering growth should have a ‘sunset’ clause, say,
for a period of five to seven years after which the firm should be able to sustain itself.
Role of Policies

11. Reorienting Priority Lending Sector
• Banks generally have a target of lending to MSME’s. This would enhance the flow of credit which can
create most jobs in the economy.
Focus on High Employment Elastic Sectors
• To step up the impact of economy growth on employment, the focus has to be on such high employment
elastic sectors, which include manufacture of rubber, plastic products, electronic and optical products etc.
Focus on Service Sectors with high spillover effects such as tourism
• Developing key tourist centers 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.
Contd.

12. Thank You
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
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