SMEs: The blind side of Gujarat model

The key economic parameters of Gujarat show the state has done well with capital-intensive industries but needs to focus more on small enterprises and some key social indicators.
 
The state, set to see Assembly elections on December 9 & 14, helped fuel Narendra Modi’s rise to the national arena, riding on a much touted Gujarat Model. But, this model might not hold water when parameters are compared with similar industrialised states.
 
Gujarat produces 7-7.5 per cent of gross domestic product (GDP) and is ranked fifth (among 29 states) in per capita income. It has an 18.5 per cent share in national factory output (highest among peers with similar levels of industrialisation). But, it employs only 10.5 per cent of the factory workforce. Tamil Nadu with 10.2 per cent share in factory output beats Gujarat with 15.3 per cent share of workers in factories.
 
Devendra Pant, chief economist of India Ratings, says Gujarat has more capital-intensive industries (refineries, petrochemicals and chemicals), which are technology-driven and not necessarily labour-intensive. “In comparison, Tamil Nadu has textile clusters, among others, which are highly labour-intensive.”

However, technology-driven industries also need to focus on improving literacy rates, so that a local talent pool is available. Else, migrant workers take plum jobs and this skews wealth distribution and poverty rate parameters.
 
The growth push inflated Gujarat's debt — Rs 2.22 lakh crore at the end of March 2016. Pant says debt cannot be seen as an absolute figure. “If an economy is bigger, it will need more resources; hence, debt levels will be high. Gujarat’s debt as percentage of gross state domestic product (GSDP) is 22.5 per cent.  Maharashtra is 17.6 per cent and Tamil Nadu is 19.1 per cent,” he says.
 
Gujarat’s literacy rate has improved from 69.1 per cent in 2001 to 78 per cent in 2011 (the national average rose from 64.8 per cent to 73 per cent). But, Gujarat still lags peers. Maharashtra, for example, has a literacy rate of 82.3 per cent (2011).
 
Gujarat’s focus, especially for 10 years, on attracting big industries has helped boost its image as an investor-friendly state. This has also come at a price. Sociologist and political observer Christophe Jaffrelot explained in an article recently that the state had to give significant subsidies. “Sales tax incentives, and deferment, Rs 1,253.6 crore per year between 1990-1991 and 1999-2000, jumped by almost five times during 2000-2001 to 2006-2007 — they amounted to Rs 5,966.7 crore per year.” This has been a drag on the state exchequer.
 
The state has also increased social sector spend. From a 5.5 per cent share in GSDP in 2012-13, this spending grew to 6.6 per cent of GSDP in 2015-16; GSDP grew 26.6 per cent in this period.

A cause of worry for the government would be the growth rate of the micro small & medium enterprises (MSME) sector.
 
In five years, big industries saw average annual fresh investment of 25-30 per cent. The MSME sector has in the past year seen single-digit growth. The period also saw a five-year high rate of closed units at 20 per cent against five per cent earlier.
 
The skewed industrialisation in favour of large industries has meant nominal growth in wages in real terms. According to a National Sample Survey, in 2009-10, the informal sector represented 84.1 per cent of the workforce in Gujarat. A 2011 report puts the state at the third-lowest average daily wages for casual labourers in urban areas.
 
Indian Institute of Management-Ahmedabad faculty member Sebastian Morris says this is a national phenomenon that has accentuated in highly industrialised Gujarat. “The whole idea that a state can choose to grow at whatever rate it wants is flawed. The growth rate of a state is linked with the nation's growth rate. It is because the Centre has not delivered in terms of growth rate that Gujarat has also seen sluggishness in the past two-three years. In Gujarat, being highly leveraged with the national growth rate, the impact is felt more.”

Decisions, or the lack of it, at the national level — such as deferred reduction in interest rates, delayed public spending, lack of proper strategy for pushing manufacturing — are among the reasons that have slowed Gujarat, adds Morris.
 
Another concern has been on certain key social indicators such as infant mortality rate (IMR) and poverty rate.
 
Gujarat has done well in the key social indicator of IMR, by clocking a 50 per cent decline from 60 deaths per 1,000 infants in 2001 to 33 in 2015. But, it lags not only more affluent peers like Maharashtra (21 in 2015) and Punjab (23), but also some special category states such as Himachal Pradesh (28), Jammu & Kashmir (26), Tripura (20), Sikkim (18) and Nagaland (12). In terms of poverty rate, at 16.6 per cent in 2011-12, Gujarat improved its tally from 31.8 per cent in 2004-05. Though better than the national average of 21.9 per cent in 2011-12, Gujarat still lags some like Andhra Pradesh (9.2 per cent) and Tamil Nadu (11.28 per cent).