Syllabus: GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Context: A country progresses when small and mid-sized firms grow, and create jobs alongside. India over the years is facing the problem of inadequate mid-sized firms.
How are job creation and firms’ size related?
- Contribution of Large firms: McKinsey Global Institute (MGI) in a recent report titled India’s turning point, an economic agenda to spur growth and jobs points out that India has around 600 large firms which earn a revenue of more than $500 million per year.
- Higher productivity:The labour productivity of large firms is 11 times higher than that of the overall economy.
- Growth in export and employment generation:These firms are also responsible for 40% of exports and employ 20% of the people in the direct formal workforce.
Why does India have fewer large firms?
- India’s missing middle of mid-sized firms: It’s the mid-sized firms which grow into large firms, and create jobs and competition along the way.
- Slow corporate growth:slow corporate growth led to slow economic growth and a situation where only 77 mid-sized firms became large between 2012 and 2018.
- Chain reaction: since 2017, India’s GDP is free falling and in 2018, the revenues of large Indian firms amounted to 48% of nominal GDP compare to 58% in 2012.
- Comparison with Other countries:
- The contribution made by large firms in other emerging economies like China, Malaysia and Thailand was 1.5 to 1.6 times that of India.
- India has fewer large firmsrelative to gross domestic product (GDP) than China, Malaysia, South Korea and Thailand.
- As per MGI, India’s 1,500 mid-sized firms per $1 trillion of GDP, with revenue between $40 million and $500 million, are only about half the number in peer emerging economies relative to their GDP.
What are the possible reasons for mid-sized firms?
- India’s high cost of compliance.
- The small and mid-sized firms lack the organizational resourcesto manage costly procedures.
- Due to cumbersome procedure, it takes 1,445 days to enforce a contract in India. However, in South Korea it takes 290 days.
- Lack of access to low-cost capital stops firms from growing bigger.
What steps should be taken to tackle this?
- Lack of capital problem can be tackled by deepening India’s capital markets.
- India needs to triple the size of its large firms by 2030.
- Unlocking land supply and allow prices to fall by 20% to 25%.
- Creation of flexible labour markets, privatizing the 30 largest PSU firms.
- Efficient power distribution.
- Improving ease of doing business and sector specific policies to improve productivity.