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Mint | Social capital can help close a wide MSME gap
By Nitin Pai
In his inaugural address to the first Industrial Conference in Pune in 1890, Mahadev Govind Ranade noted that “the industry of the country is parched up for want of Capital" because after land revenue, a considerable portion of gross savings was used to hoard bullion. The lack of institutional arrangements for industrial finance meant that capital was locked up in unproductive assets and not available to India’s entrepreneurs. A century later, the German economic historian Dietmar Rothermund came to a similar conclusion. Lacking financial institutions, Indian surpluses in the second half of the 19th century went into gold and land. Meiji Japan, in contrast, was able to “gather small savings and to channel them into the mainstream of the national economy," enabling the country’s industrialization. Read the full article here.
But What About the Jobs Crisis?
Job creation remains India’s biggest economic challenge. Analysing the 2018 union budget through the jobs lens is bound to leave one disappointed. The first impression is that the gravity of the employment situation has not descended on the present government. Focusing on small and micro-enterprises and entrepreneurship will not deliver the amount of jobs that is required.
There was a big push for the MSMEs in this year’s budget. The Finance Minister emphatically stated that “Medium, Small and Micro Enterprises (MSMEs) are a major engine of growth and employment in the country,” and went on to allocate Rs 3794 crores (quite a small number) to the MSME Sector for giving credit support, capital and interest subsidy and innovations. This was lauded by many as a policy push in the right direction.
The wide-ranging consensus on the importance of MSMEs in India is impressive. There is near universality in declaring MSMEs to be the engine of economic growth in India and the driver of job creation. Just for clarity on terminology, a micro enterprise employs less than 10 people, a small enterprise less than 50 people and a medium enterprise less than 300 people. This definition is according to the World Bank, though countries often classify them according to the initial investment (India), turnover, and other criteria.
There are numerous reports, even by reputed consulting firms, that speak about the benefits of MSMEs. The reasoning for this is often fallacious. “MSMEs will generate employment in the future, because they provide employment now” is the general reasoning. Imagine if the same thinking persisted in the 1800s when horse carts were the main form of transportation and a major source of employment – chances are that there would be no investment in the railways at all.