Economic Survey calls for 'sunset' clause on policy incentives to MSMEs

Topics MSME | Economic Survey | budget 2019

The Economic Survey has pitched for a “sunset” clause on policy incentives given to small firms and asked the government to handhold “infant” or new firms rather than “dwarfs” — a term used by Chief Economic Advisor Krishnamurthy Subramanian to describe firms that never grow beyond their small size. 

“Job creation in India suffers from policies that foster dwarfs, that is small firms that never grow, instead of infant firms that have the potential to grow and become giants rapidly,” the survey said, categorising small firms as those employing less than 100 workers. Dwarfs were defined as small firms in operations since more than 10 years and “infants” as newer companies that are small in size in terms of workforce, according to the survey. 

Analysing the Annual Survey of Industries (ASI) data, the survey said dwarfs accounted for more than half of all organised firms in the manufacturing sector, but contribute only 14 per cent in employment generation and a “mere” 8 per cent to productivity. 

“In contrast, large firms (more than 100 employees) account for three quarters of such employment and close to 90 per cent of productivity, despite accounting for about 15 per cent,” the survey said, emphasising that it is a misconceived notion that small firms are significant job creators as they are also responsible for job destructions because they “find it difficult to sustain the jobs they create”. 

While large firms create permanent jobs in large numbers, according to the survey, young firms create more jobs at an increasing rate than older firms. As a possible solution, the survey called for a “sunset” clause for a period of five-seven years for policy incentives beyond which a small firm “should be able to sustain itself”. It further suggested re-orienting the priority sector lending norms to focus more on start-ups and “infants” in high employment elastic sectors dealing with rubber and plastic products, electrical and transport equipment, textiles, among others. 

The survey’s chapter titled ‘Nourishing Dwarfs to Become Giants: Reorienting Policies for MSME (micro small and medium enterprises) Growth’ made a larger point that policy incentives need to be provided to new firms, rather than older MSMEs, as it acts as a disincentive for firms to grow. 

“With the appropriate grandfathering of existing incentives, they need to be shifted away from dwarfs to infants. When such incentives are provided to firms irrespective of their age, the incentives create “perverse” incentives for firms to stay small,” the survey suggested. 

Age of the firm being the criterion, “such perverse incentives” would not be there, according to the survey. It mooted using Aadhaar to prevent misuse of age-based criterion. 

“For instance, if a promoter starts a new firm, utilises the benefits for 10 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,” the survey said. 

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel