Indian SMEs remain small, says study

The main reasons are stringent labour laws and the associated inflexibility in the labour market

A recent study has said that Indian firms that start as small or medium enterprises tend to stay small or become even smaller, in contrast to their counterparts in developed economies like the US, which grow substantially. One of the main reasons for this, the study said, is the country's stringent labour laws and associated inflexibility in the labour market.

The study, conducted by the Export-Import Bank of India, which compares various laws in selected countries, stated that across the globe, a majority of firms are born small and tend to grow over the years, in terms of both size and employment. In India, however, the majority of newly-set-up companies tend to stay small.

The study gave the example of the US where, in 35 years of existence, a company grows ten times in terms of both operations and employment. In contrast, in India, the productivity of a 35-year-old firm merely doubles, while its headcount actually falls by a fourth. The main reason cited for such a situation has been India's stringent labour laws and inflexibility in the labour market.

Laws which were cited as examples are the Industrial Disputes Act, the Contract Labour Act, and the Trade Unions Act.

While advocating labour-restructuring reforms, the study noted that China started liberalising its labour market from the mid-1980s and deepened the liberalisation with ownership- and labour-restructuring reforms from the late 1990s. These reforms have given Chinese firms more flexibility than Indian firms have in adjusting staffing to meet changing economic conditions and to take advantage of technological developments.

Chinese firms have taken advantage of this flexibility by increasing the proportion of workers on temporary contracts.

The report also said that the ceiling on investment of SMEs has been a major factor holding back capacity additions and technology adoption in manufacturing SMEs. These constraints adversely affect the ability of firms to respond to challenges, thereby pulling down the relative competitiveness of Indian manufacturing as compared to other countries, the study said.

An analysis of the comparison of factory employment in select countries using Unido data showed that the average number of workers in an Indian firm is extremely low at 75, in comparison to China's 191 and Indonesia's 178. Per-unit employment in India is low despite the fact that India's manufacturing base is largely labour-intensive. While this data is for the organised sector, the average number of workers in unorganised enterprises is much lower.

"While the average number of factory employment in India at 75 correlates to the applicability of the Industrial Disputes Act, a large number of enterprises are estimated to be employing less than 10 workers, even in labour intensive manufacturing, which remains unexplained," says the study.

 

The low level of average factory employment in developed economies such as Germany, the UK, the US and France is indicative of technology-intensiveness in these economies, which is also in contrast to the state of industrial development in India, the study notes.

Another important feature of the Indian manufacturing sector, according to the study, is that only a small share of employment in manufacturing is in organised manufacturing (the unorganised manufacturing sector accounted for almost 70 per cent of total manufacturing employment in 2009-10) and employment is heavily concentrated in small firms.

This degree of concentration is much higher in India than in other Asian countries. For example, the share of micro and small enterprises in manufacturing employment is 84 per cent for India versus 27.5 per cent for Malaysia and 24.8 per cent for China.