Size and scale: Regulation should enable companies to scale up faster

Micro, small, and medium enterprises (MSMEs) play a crucial role in the Indian economy. According to the government data, their share of gross value added (GVA) in gross domestic product increased from 27.3 per cent in 2020-21 to 30.1 per cent in 2022-23. Exports by MSMEs increased from about ₹4 trillion in 2020-21 to ₹12.39 trillion in 2024-25. Given the importance of MSMEs in economic growth, they must be given an appropriate environment to grow in and should be supported by a conducive policy framework. The Confederation of Indian Industry, along with the NITI Frontier Tech Hub and the All India Council for Technical Education, on Wednesday launched a platform called the Digital Excellence for Growth and Enterprise, or “Dx-EDGE”, which will empower MSMEs with tools and knowledge to remain competitive. Such initiatives spearheaded by an industry body with government institutions must be welcomed because they could help small and medium-sized firms make the technology transition.

 

However, gaining access to technology is not the only problem small and medium-sized businesses are facing. As rightly noted by NITI Aayog Chief Executive Officer B V R Subrahmanyam at the launch of Dx-EDGE, India does not have enough medium-sized companies to drive growth. To be fair, the problem is not new. India has had a large number of small enterprises but most fail to gain scale. In fact, as recent research by Arvind Subramanian, former chief economic advisor to the Government of India, and others showed, even some of the firms that were considered large are not actually so and operate from multiple plants. As a result, they are not able to reap gains of increased scale. One of the reasons for operating from multiple small plants is to be able to diversify legal and political risks. It becomes difficult for entrepreneurs to comply with regulations as the size increases.

 

This has also led to increased contractualisation of labour. The regulatory overhang has hindered Indian firms from scaling up, resulting in low manufacturing GVA. It has also meant that nearly half the Indian labour force is still engaged in agriculture, and the country has not been able to capitalise on its labour abundance. Since the problem of not having enough mid-sized firms is not new, solutions have been discussed over time. In the context of labour laws, new labour codes have been passed, though they have not been implemented because of a lack of consensus among stakeholders. Legal and operational issues need to be addressed at multiple levels. In its report this week, the Public Accounts Committee of Parliament, for instance, highlighted issues being faced by MSMEs and exporters under the goods and services tax regime. Such issues must be proactively addressed.

 

Prime Minister Narendra Modi recently talked about the idea of a deregulation commission. Such a commission, depending on its terms, can go a long way in assisting the government and regulators to get rid of redundant and unnecessary regulations. Given the protectionist tendencies, the global economic environment is likely to be unsupportive in the foreseeable future. The policy objective, particularly in the current environment, should be to remove regulatory constraints on Indian businesses and enable them to grow and compete.