The government on Thursday said "perverse incentives" targeting "dwarf" companies must be replaced with prioritising start-ups and "infant" firms in high employment-elastic sectors to foster economic growth and create jobs.
According to the Economic Survey 2018-19, tabled by Finance Minister Nirmala Sitharaman in Parliament, policies for growth of India's MSMEs should be re-oriented based on a firm's size and use of Aadhaar to avoid misuse of age-based incentives having a sunset clause of less than 10 years.
While dwarfs, firms with less than 100 workers despite being more than 10 years old, account for more than half of all organised firms in manufacturing by number, their contribution to employment is only 14 per cent and to productivity is a mere 8 per cent, said the Survey.
It said job creation in India suffers from policies that foster dwarfs, small firms that never grow, instead of infant firms that have the potential to grow and become giants rapidly.
Deregulating labour law restrictions can create significantly more jobs, as seen by the recent changes in Rajasthan when compared to the rest of the states, it noted.
In the chapter titled 'Nourishing Dwarfs to become Giants: Reorienting policies for MSME Growth', the government observes that 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 will generate economic growth and employment.
The survey also calls for focus on high employment elastic sectors such as chemicals and chemical products, textiles and leather & leather products to enhance direct credit flow to sectors that can create the most jobs in the economy and service sectors like tourism.
"According to the extant policy, certain targets have been prescribed for banks for lending to the micro, small and medium (MSME) sector that exacerbates perverse incentives to firms to remain small," the government said in the survey.
According to priority sector lending (PSL) guidelines, 7.5 per cent of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher is applicable to micro enterprises. Under MSME's PSL targets, it is necessary to prioritise 'start-ups' and 'infants' in high employment-elastic sectors, it said.
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 by number.
Besides, it said, with 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.