'Micro units' surplus too small to fund growth'

Employment intensity (average number of employees per unit) and productivity (gross value addition per employee) are considerably higher in small enterprises than in micro enterprises, according to an analysis by Nathan Economic Consulting India Private Limited of data collected from the Fourth Census on MSMEs in India.

The analysis, done for the Ficci Confederation of MSMEs (Ficci-CMSME), reveals that micro enterprises have an employment intensity of 4.4 - about one-seventh that of small enterprises (30.6) - and their average surplus after meeting all input costs (but excluding labour costs) is about Rs 1.88 lakh per year per employee, just 41 per cent of the surplus of small units (Rs 4.55 lakh per employee).

The Nathan India report, titled Nurturing Entrepreneurship in India, says micro units' small surplus is insufficient to finance organic growth or expansion, and even a short-term external shock can easily lead to the failure and closure of the unit. This is significant, given the finding of the Fourth Census on MSMEs that of the total of 15.93 lakh registered units, nearly 95 per cent are single-proprietor micro enterprises.

The study reveals that units that acquire technology and technical knowhow reported over 70 per cent higher value addition and provided two times more employment, compared to units without outside technical knowhow. The report says there is a need to factor in this aspect in designing subsidy schemes applicable to the MSME sector.

Government policy has long focused on the employment generation ability of MSMEs rather than their scale of operation, choosing to compensate for their low productivity and lack of competitiveness by providing subsidies, the report says. It recommends that government schemes and subsidies should be subject to a minimum size of investment. This will encourage start-ups to discard the mindset of limiting their project costs to the maximum eligible amount, and will provide them with an incentive to scale up their businesses and induct modern technology.

The study reveals that the employment intensity of partnership firms is four times higher than that of proprietary firms, because partnership firms are more likely to pool their resources and risks to achieve higher value addition and create more employment. The government, it says, should, therefore, incentivise proprietary firms to adopt a partnership structure, as this would help them to bring in new capital and manage risks more efficiently.

A limited liability partnership structure combines the limited liability benefits of a company with the flexibility of a partnership, and is the most appropriate form for the MSME sector, the report says. It adds that the recent Budget proposals are expected to meet these expectations.

Nearly 25 per cent of registered MSMEs operate without any energy resources, and their productivity and employment intensity are very low, the report says, while units using electricity or fossil fuels provide higher employment and create higher value. Units using non-conventional energy sources (NCES) create a higher surplus per employee because, after the initial capital cost of setting up the NCES systems, the fuel costs are zero.

The report says governments need to encourage MSMEs to use NCES systems that provide more reliable and almost free energy. The use of NCES systems, it says, would also help those units that are not using power to mechanise their systems without incurring additional recurring costs. Besides, the use of NCES would help to reduce the risks of production losses resulting from power shortages, it adds.