A leading industry lobby recently came out with a feel-good report claiming that the micro, small and medium enterprises (MSME) sector has added up to 14.9 million jobs annually in the past four years. This suggests a 13.9 per cent increase in net jobs created, or a 3.3 per cent yearly growth over the study period. But the optimistic figures have those from within the MSME sector a trifle puzzled. The scenario painted by the industry lobby is contrary to the ground reality. Even the government had to acknowledge that MSMEs were badly hit: In November last year, the Centre had taken steps to provide easier credit to bail out many micro and small units that have been languishing or are gasping to survive for want of fresh capital.
“The CII data may well have captured the shift of MSMEs from informal to formal sector as there is no national register that shows how many people were working and what has been the growth in employment. It may well be a perception report based on the number of units now getting registered and moving from informal to formal sector and taking this to project employment growth,” says Animesh Saxena, president of the Federation of Indian Micro and Small and Medium Enterprises (FISME).
In other words, there is no data on new jobs, but more workers are now formally registered which shows a spurt in the number of employed people. The shift from informal to formal sector is borne out by the 10-12 per cent rise in the number of MSMEs registered with the FISME after the introduction of GST. The lure of getting registered under GST is the input credit such companies can obtain. Another attraction is that registered companies are able to avail themselves of easy government loans and interest subvention being provided to the MSME sector.
“The demonetisation has led to part formalisation of informal sector which is positive. Other MSMEs in the informal sector have ceased to exist. Yet, two-and-a-half years later, the situation would appear to have normalised,” says René Van Berkel, the United Nations Industrial Development Organization (UNIDO) representative in India.
Overall UNIDO observes a division of MSMEs in two broad categories. The largest share falls within a group of sustenance (or sometimes lifestyle) businesses that serve as an alternative to employment, are surviving but not able and not aspiring to expand and grow their business. The others are market-oriented MSMEs that are professionally and forward looking in their management and thus continuously working to expand their business.
The MSME sector has been languishing for the most part since demonetisation, which led to large number of job losses at the lower end of MSMEs, especially those working in tiny units, because of cash crunch. Around 50 per cent of the workers in the MSME sector work at that level. These units have limited access to institutional finance so they depend on the cash payments by companies for which they undertake job work in a product manufacturing chain. “Mostly it was a cash economy they were working in. Because of the cash crunch and uncertainty of when it would resume, a lot of people lost jobs or were not being paid,” says Saxena. “After three to four months, some of these units started limping back but before they could stablise, the GST was introduced, creating stress as a lot of people in the supply chain were not fully prepared for the new tax regime...”
MSME clusters claim that it is only in the past six months that things have normalised. The jobs that are being created are mostly in the informal sector (a part of MSME) like in the case of job workers who temporarily hire ad hoc workers for work. Such people also engage people to work from home. Saxena emphasises that FISME has “no data on such people. But in the formal sector or larger manufacturing units we have not seen much job growth”.
Arun Maira, chairman of the Foundation for MSME Clusters, says growth of MSMEs depends on their ability to keep investing and lubricating their business with infusion of fresh capital and that got badly affected post-demonetisation. So MSMEs, particularly the micro and small units, are not growing the way they used to. “Many say they have been stagnating while some claim they are on their deathbed,” says Maira, who is a former member of the now-defunct Planning Commission.
Maira says based on common sense understanding of the forces that help MSMEs to grow and generate more employment, “those forces clearly have not been in the favour of MSMEs. Partly because of this crisis everybody got alarmed about the MSMEs. I am glad the crisis has forced attention on things that may otherwise have been overlooked for a long time: the fact that MSMEs are engines of growth and they generate employment, and so on”.
UNIDO representative Berkel points out that overall the GST system has put further pressure on cash flows and finances of enterprises and this seems to hurt MSMEs most. “Many MSME thus face significant financing challenges. The government is reaching out to assist with its MSME Outreach and Support Programme (launched last November), but it seems too early to ascertain the impacts thereof,” he stresses.
It is not all grim in the MSME sector as auto parts units in Gurgaon and Faridabad point out that despite the turbulence of demonetisation and GST, glitches are still to be fully ironed out, they have not had to lay off workers as the automobile sector has been more or less been on an even keel. To tide over the cash crunch, many units helped their staff open bank accounts. This led to regularisation of jobs of almost 30-40 per cent staff, admitted company owners, adding that while there has been no layoffs, there has also been no expansion for the past three years.
A more positive narrative can be had from Tiruppur, one of the largest textile clusters in the country. R. Shanmugam, president of Tiruppur Exporters’ Association, reveals their cluster has seen a big turnaround since 2011-12, when it was struggling to sustain due to global slowdown and pollution-related problems. After the infrastructure and pollution issues were resolved, the Tiruppur cluster has seen a big turnaround. “Where Tiruppur is concerned, jobs were generated between 2013 and 2017 as our turnover increased over three-folds from Rs 10,500 crore to Rs 45,000 crore which resulted in our labour force increasing from 2.5 lakh to around 6 lakh,” says Shanmugam. “Despite demonetisation and GST we did not see any noticeable job losses in Tiruppur since the cluster itself is growing. Even now we see trainloads and busloads of people from northern states coming for jobs in Tiruppur.”
Shanmugam is quick to state that nearby industrial clusters were not as lucky as Tiruppur as demonetisation and GST glitches put a lot of hardship on the MSME units. Recognising the growth potential of MSMEs states such as Andhra Pradesh, Telangana, Chhattisgarh and Odisha are offering incentives, including prefab structures and easy credit for a quick start.
On the jobs front one would have to study the period of comparison. As experts point out more jobs are probably being generated over the past six months. But it is important to know how many jobs the MSMEs were generating five years ago, when it was definitely more. If compared to two years back, when thousands of jobs were lost, the picture now is bound to be rosier.
The Formal Health
- There is no national data on people employed in MSMEs
- MSMEs include units both in the formal and informal sectors
- Post-GST, there is an increase in the number of MSMEs being registered
- The Centre’s easy credit plan is also pushing MSMEs into the formal sector
- Recent rise in job-creation capacity of micro/small units