Prof.R.Ramarao, Vignana Jyothi Institute of Management, Bachupally, Hyderabad,A.P.Ph.No:09849946716

Out of the Box strategies for Generating Jobs through MSMEs

ABSTRACT

03-06-2014

The Indian economy is presently clouded by some slowdown in growth affecting the

employment generation. Looming uncertainty in the global economic environment has adversely

affected employment generating sectors like Trade. India’s economic performance is shifting

gears to include the private sector in driving employment growth. A relook at the growth

strategies of the country is essential to reverse the decreasing employment generation rate. The

model adopted in 11th five year plan viz. achieving high growth rates through productivity led

capital formation could have worked well then. A critical point that cannot be overlooked is the

reduction in the long term employment growth rate from 2% per annum till the last decade to

1.5% over the recent years, though GDP grew at an average rate of 7%. Over the last decade

contribution of employment generation to the growth of GDP has sharply declined to 20% and

the share of productivity has risen to a whopping 80%. This might look good for less populated

countries but is not the model suitable for a thickly populated and labour abundant country like

India. Even a steep rise in exports could not deliver the increased employment generation as

expected. Rejuvenating the employment generation scenario in India is the need of the hour.

Suitable growth model, balancing the productivity and employment generation, is to be

adopted.Rebalancing of growth with focus on manufacturing and greater domestic orientation

is now necessary to improve its employment content. In order to achieve an average economic

growth rate of 9.0 per cent, twelfth plan envisioned the rate of fixed capital formation to be

around 34.5 per cent of GDP. A share of 12% by household sector (including realty, Micro and

Small Enterprises (MSEs)), 14% by Private sector and 9% by Public sector was visualized.

These ratios may have to be changed to make it capital formation oriented but focused on labor

intensive sectors like realty, MSEs. The labour to capital ratio in MSMEs and the overall growth

in the MSME sector is much higher than in the large industries. Worldwide MSMEs account for

95% of firms with about 60% of employment generation. At the macro level, out of the box

strategy will be to relook at the growth strategy of the nation as mentioned above. At the micro

level many out of the box strategies can be formulated and implemented to make MSMEs the

nation’s prime engine of employment generation. Strategies include, turning phenomenon like

climate change, ageing population in the world into opportunities of growth. Green innovations,

Tourism, local innovations (Jugaad), development of village industry, fostering self-

employment through entrepreneurship schemes, establishing production and marketing centers

through Khadi and Village Industries Commission schemes, converting agricultural employment

into agri-processing industry employment by household/small industry firms, revitalizing

traditional labour-intensive products such as handicrafts, textiles, toys etc. Experience has shown that rapid growth in the recent past has been accompanied by shortages of specific skills especially hitting the the MSME sector hard. A lot needs to be done in the area of skill development to adequately complement the potential expansion in the level of economic activity. This paper discusses these and many other strategies to improve employment generation through innovative methods. The paper lays stress on the aspect of employment generation not just getting concentrated in urban centers alone to avoid key geographic and gender exclusions. Out of the box employment generation strategies consider contrasting parameters like external trade and domestic consumption, manufacturing and services, rural as well urban infrastructure, information, skills and knowledge, traditional and modern living etc. as sources of opportunities and exploit to take utmost advantage of these. This paper dwells on these issues and the likely impact they may have on employment generation in the country in the future.----------------------------------------------------------------------------------------------------------------

Out of the Box strategies for Generating Jobs through MSMEs

1. Introduction

India witnessed a phase of high GDP growth rate of an average 7% for almost a decade till the

year 2010, sometimes even touching 9% growth in some years. Even when Europe, US and

ASEAN countries faced severe downturns, both China and India have weathered the situation

and continued to grow at a respectable rate. However from 2011, India’s growth story has taken

a declining turn recording a rate of under 5%, for two years in a row, in the fiscal years 2013 and

2014. Government of India attributes the reason for this low growth to the slowdown in

developed economies worldwide and the deeper global integration of India having its logical

consequences in employment generating sectors like international trade. But other economists

argue that this is only one side of the story and these reasons themselves are not the key reasons

for India’s poor performance. Despite challenges from the external front, India’s internal market

is large enough to absorb these surpluses and provide opportunity to offset this impact as it is

still underserved. Supply side dimensions are controllable as they are internal in nature. Hence

policies that merely focus on external markets will not yield the expected results. Hence a

preferred approach is to find solutions to plug supply side deficiencies to help revive growth and

sustain it for continuous employment generation. This is helpful in two ways. India can build its

strengths and become competitive by the time the opportunities revive in external markets to

grab its share. Supply side bottlenecks include poor quality labor inputs along with already over

stretched social and physical infrastructure.

There was a reduction in the long term employment growth rate from 2% per annum till the last

decade to 1.5% over the recent years despite GDP growth. Further, a sharp decline in

contribution of employment generation to 20% of growth of GDP is observed as against the

share of productivity rising to a whopping 80%. Hence the present growth model is that of high

growth rates through productivity led capital formation. Insufficiency and not so right

application of the capital is hindering the capital formation including infrastructure This may not

be appropriate and needs a relook for a thickly populated and labour abundant India. A relook at

the growth strategies to reverse the trend and rejuvenate the employment generation is the

present requirement. The new growth model needs to balance the parameters of productivity and

employment generation. But one front where India has its numbers right is its young manpower.

This resource has to be effectively utilized if demographic dividend has to be reaped by the

nation. The only way that can be done is through employment generation for maximum number

of youth and also across the sectors, skills and professions. The mix of these should be adequate

to match the availability of the type of man power and the type of jobs and technologies. Where

required suitable employable skills have to imparted through training and development measures

by investing in these. The future growth model should arrive at a suitable mix of agriculture,

manufacturing and service sector contribution keeping employment generation as one of the

priorities. This is certainly possible by generating ideas through out of box thinking. This paper

attempts to generate some such ideas. Focus on manufacturing with greater domestic orientation

to improve employment content is one such idea. The proposed growth model should factor into

it capital formation ideas that are focused on labor intensive sectors like infrastructure and

MSMEs. Including private sector in driving employment growth is an important aspect as public

sector alone cannot meet the targets. Among the private sector the labour to capital ratio in

MSMEs and the overall growth in the MSME sector is much higher than in the large industries.

MSMEs can achieve the inclusive growth better than large industries and technology intensive

industries. Worldwide MSMEs account for 95% of firms with about 60% of employment

generation. Appropriate technologies have to be domestically developed to overcome efficiency

and cost considerations. Indigenously developed innovations help solve the problems. MSMEs

firms are the universal vehicles all over the world to achieve the goals of employment

generation, inclusivity, innovation, distributed economic activity across population, sectors,

geography and other critical factors needed for sustained growth leading to sustained

development. The firms operate in very different markets rural, semi-urban, metro cities, local,

national, regional as well international. They operate at different levels of skill sets, investment,

intricacies and growth orientation. MSMEs also nurture entrepreneurial talent in addition to

being effective engines for poverty alleviation and women employment. Be it in manufacturing

or service sector MSMEs can become the engines that sustain growth for long-term development

for India. When growth becomes stronger, SMEs gradually assume a key role in industrial

development and restructuring. They can satisfy the increasing local demand for services, which

allows increasing specialization, and further support larger enterprises with services and inputs

2. Objective of the Study

The study aims to

a. Study of growth models followed by other nations for employment generation

b. Generating out of box ideas for employment generation

c. Role and impact of MSMEs in employment generation worldwide

d. Examine and understand the role of MSMEs for India’s employment generation

e. Suggest and also consolidate India-specific measures to generate employment through

MSMEs.

3. Scope and Limitations of the Study

The study is limited to the advantages of MSMEs being the engines for employment generation.

The aspects of employment generation in other nations through MSMEs have been taken as the

base for the paper. It does not go beyond to cover the negative aspects if any in choosing

MSMEs as growth engines for employment generation. Further the limitation also lies in the

assumption that what applies to one nation cannot be generalized to all nations and each nation

has to suitably modify the model based on its requirements.

4. Nomenclature

4.1. MSME :Classification of SMEs varies from nation to nation. In fact the word MSME by

combining micro enterprises with SMEs is unique to India. The classification shown below is as

per Indian Act. In accordance with the provision of Micro, Small & Medium Enterprises

Development (MSMED) Act, 2006 the Micro,Small and Medium Enterprises (MSME) are

classified in two Classes1- i) Manufacturing Enterprises engaged in the manufacture or

production of goods pertaining to any industry specified in the first schedule to the industries

(Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in terms of

investment in Plant & Machinery and ii) Service Enterprises engaged in providing or

rendering of services and are defined in terms of investment in equipment. The limit for

investment in plant and machinery / equipment for manufacturing / service enterprises are as

under:

Manufacturing Sector    Enterprises  Investment in plant & machinery    Micro Enterprises  Does not exceed twenty five lakh rupees    Small Enterprises  More than twenty five lakh rupees but does not exceed five

crore rupees    Medium Enterprises  More than five crore rupees but does not exceed ten  crore

rupeesService Sector    Enterprises  Investment in equipments    Micro Enterprises  Does not exceed ten lakh rupees:    Small Enterprises  More than  ten lakh rupees but does not exceed two crore

rupees    Medium Enterprises  More than two crore rupees but does not exceed five core

rupees

4.2. Developed Nations: Which criteria are to be used and which countries can be classified

as being developed are subjects of debate. Developed countries have post-industrial economies,

meaning the service sector provides more wealth than the industrial sector. They are contrasted

with developing countries, which are in the process of industrialization, or undeveloped

countries, which are pre-industrial and almost entirely agrarian. According to the International

Monetary Fund, advanced economies comprise 65.8% of global nominal GDP and 52.1% of

global GDP (PPP) in 2010. In 2011, the ten largest advanced economies by either nominal GDP

or GDP (PPP) are Germany, France, Japan, Italy, Canada, Spain, Australia, South Korea, the

United States and the United Kingdom

4.3. Developing Countries A developing country, also called a less-developed

country (LDC), is a nation with a lower living standard, underdeveloped industrial base, and

low Human Development Index (HDI) relative to other countries. There is no universal, agreed-

upon criterion for what makes a country developing versus developed and which countries fit

these two categories although there are general reference points such as a nation's GDP per

capita compared to other nations. Also, the general term less-developed country should not be

confused with the specific least developed country.

5. Literature Review

5.1. Sustainable Growth Model

Growth is classifiable into rapid growth and balanced growth. Rapid economic growth links it to

greater inequality to lower future growth paths considering it as an impediment to poverty-

reducing growth (African development Bank, Marrakech). Growth through industrialization

helps long-run poverty reduction. Pattern of industrialization remarkably impacts the benefits of

growth accruing to the poor. Policies focusing on productive factors that the poor possess viz.

raising returns to unskilled labor, use of labor intensive methods in place of capital intensive

methods, promoting development of rural non-agricultural activities like production in MSMEs

may decrease this disparity. China and some East Asian countries have followed this model and

attained success. Industries which employ a high proportion of unskilled workers and/or use

domestic inputs and raw materials produced with labor-intensive technologies can have positive

effects on incomes of the poor. In Taiwan and South Korea technology and know-how have been

imported from abroad and adapted to the domestic resources, in particular to the abundant labour

force (Matleena and Pellervo, 2007). Contrary to this approach in Brazil and India,

manufacturing has tended to be relatively capital intensive, creating relatively modest

employment opportunities for the poor. Though service sector has been a major contributor to

recent growth in India, the dynamic service industries like software and back-office processing

have provided few jobs for the unskilled directly and also limited geographical spread of these

partly explain why some parts of Brazil, India, Indonesia or Mexico are much less developed

than other parts of those countries specially the interior regions.

Growth achieved at the cost of greater inequality, higher unemployment and overconsumption of

natural resources needed by future generations inevitably unsustainable. Development means

improvement in the quality of life of all the citizens of a nation. Creation of large number of

economic activity can provide avenues for people to work and earn a decent living for

themselves and their families, thus initiating true economic development. Sustainable economic

growth structure is mix: Agricultural growth generates employment, strongly benefitting the

rural households through proper functioning markets by establishing opportunities in both

domestic and foreign markets made possible by encouraging high-value export-crops without

compromising growth in staple crops (Thurlow and Wobst,2012). Emphasis should be on value

addition in exports through agro-processing and labor intensive manufacturing including agro

processing export.

5.2. Employment Generation measures worldwide

Japan launched a new growth Strategy in June 2010 that focuses on demand-led growth to

achieve a strong economy for boosting demand and employment by turning problems such as

climate change and population ageing into opportunities for growth. This was deemed necessary

as earlier supply-side measures to boost productivity worsened unemployment and exacerbated

income inequality. The new areas include Green Innovation, Life innovation, Tourism, local

innovation, Financial Sector, National Vocational Qualifications (Jones and Yoo, 2011).

Government of Ireland had developed a detailed plan for massive Job creation. This action Plan

for Jobs address seven principal areas some of them being viz. Building competitive advantage –

through skills & infrastructure, supporting indigenous start‐ups, attracting inward entrepreneurial

start‐ups, developing and deepening the impact of FDI, developing employment initiatives

within the community. For this exploiting sectoral opportunities including Manufacturing,

Health/Lifesciences and Green Economy, Agri‐Food, ICT Hardware and Software, Cloud

computing, Digital Games, Tourism, International Financial Services, Business Process

Outsourcing/Shared Services, Education Services, Construction, Retail/Wholesale, Arts, Culture

and Creative Enterprise (Government of Ireland, 2012). The actions planned involve establishing

a new potential exporters division to target a wider group of potential exporting companies;

establish a new “one‐stop‐shop” micro enterprise support structure that will work with local

authorities in each local authority, establish Ireland IDA senior management team to work on

cross‐agency priorities such as attracting international start‐ups, improving mentoring for SMEs,

and helping SMEs win supply contracts from multinationals and measures to make public

procurement more accessible to Irish SMEs.

A paper by Government of Pakistan recognized a major global re-structuring in the

manufacturing as well as services sector resulting in re-location of manufacturing, design, and

service activities to places where cost reduction can be affected without compromising

reliability. It observed that such activities are generally undertaken by small and medium

enterprises (SMEs) which comprise the bulk of any nation’s economic units and contribute

significantly to employment and offering complete end-to-end services in the supplychain,

whether as manufacturers of piece parts and systems, or providers of electronic

services(Ismail,2005). These activities are ideally suited for SMEs if they can become partners in

an internationally accepted supply chain.

Department of Business Innovation and Skills (BIS) in its analysis paper no.1 of 2013, tried to

understand what opportunities exist for UK based businesses to capture larger share of supply

chain business. BIS suggests that the UK supply chain has the capacity to capture over 40% of

the value of a new reactor which could rise to about 60% with wider policy intervention and

greater industry involvement. Government interacts with sectors in a pro-competitive way, and

support the ability of a wide range of firms to compete and grow, in order to secure most benefit

from a sector approach for UK economic growth( Department of Business Innovation and Skills,

UK, 2013).

The above sectors have contributed to increase in employment in UK.

Every year new SMEs enter the market, representing 5 to 20% of the existing number of firms.

Smaller firms are often the most dynamic and innovative, and can be a test ground for new

business ideas. Although nearly half of all start-ups will fail within 5 years, a few of them will

grow to become large firms, and replace incumbents. This process yields positive structural

changes to the economy, can lead to large productivity gains, and is shown to be linked to GDP

growth.Finally, a stronger SME sector can bolster a country’s resilience by broadening and

diversifying the domestic economy, thereby reducing the vulnerability to sector-specific shocks

and fluctuations in international private capital flows. A study conducted by Small Enterprise

Assistance Fund (SEAF) highlights the economic impact of investments in SMEs. It found that:

every dollar invested by SEAF in a SME generates an additional twelve dollars in the local

economy ; 72% of new jobs generated go to unskilled or semi-skilled employees; SEAF

companies sustained an average annual employment growth rate of 26 percent and a wage

growth rate of 25 percent in US dollar terms, surpassing national growth rates for each country

(Dalberg, 2013).

Between 2002 and 2010, net employment in the EU rose substantially, by an average of 1.1

million jobs (or 0.9%) each year. 85% of this net employment growth was registered as

employment growth in the SME size class. This share is considerably higher than the share of the

SME size class in total employment (which was 67% in 2010). This implies that the employment

share of the SME size class has increased over time, and indicates the increasing economic

relevance of this size class. Within the SME size class, the highest growth rate is found in the

size classes of micro and small enterprises. Between 2002 and 2010, 85% of total employment

growth was attributable to SMEs which have a much higher employment growth rate (1%

annually) than large enterprises (0.5% a year). Within the SME sector, the highest growth rate is

found in micro and small enterprises. Micro enterprises contributed 58% of total employment

growth in EU27 in the period under review. On average, employment growth in the EU

amounted to 0.9% annually. In both large (0.5%) and medium-sized (0.7%) enterprises, job

growth was below average, while small enterprises contributed on par with the overall average.

Micro enterprises in particular experienced above average employment growth, i.e. by an

average of 1.3% a year.

Firms are demanding higher skills from workers. Should training programs focus entirely on

Providing advanced skills. Dual vocational training systems that combine classroom with on-the-

job training work best solution for this problem. Germany and Switzerland are among the most

successful examples–globally–of how this approach can help tackle unemployment.

5.3. Employment Generation measures in India

About 250 million new job seeker youth are expected to enter the market in 15 years time.

Services sector though, growing fast, alone cannot absorb this. Unless manufacturing becomes

an engine of growth, providing at least 100 million additional decent jobs, it will be difficult for

India’s growth to be inclusive.

Agriculture too has to play an important role for employment generation. Government of India

has taken several steps to provide employment to unemployed persons including youth in the

country. The Rural Employment Generation Program is implemented through the Khadi and

Village Industries Commission to help eligible entrepreneurs to set up village industry units and

thus create employment opportunities in villages including small towns. KVIC formulated a

scheme for financing projects with investment limits up to 25 lacs for rural industrialization and

empowerment generation. KVIC having track record of providing employment to about 47 lakhs

Rural populace are determined and wantto reach every household in rural area and provide

additional employment of 37 lakhs persons by the end of 2011-12. India’s Planning Commission

deputy chairperson Montek Singh Ahluwalia has set this ambitious target of 25 million new jobs

outside agriculture for the 12th plan by focussing on growth in service and manufacturing sectors

as employment in agriculture was falling. The key for creating new jobs would be “substantial”

improvement and expansion in higher education

The Census of 2011 estimates that 833 million people continue to live in rural India. The

development and transformation of the rural economy requires rapid expansion of employment

and income opportunities, both on farm and off farm. The training of a pool of local youth in

technical skills must also incorporate their ability to act as social mobilizers and ensure the

involvement of Panchayati Raj Institution (PRI) representatives at every level of the process.

Rural India has a large population of artisan families, many of whom are from the minority and

tribal communities. Most of these artisan farmers do not own any land and many find themselves

in a difficult condition with poor access to market linkages and to remunerative livelihoods.

Thought must be given as to how the MGNREGA in conjunction with the NRLM program can

help these artisan communities to obtain a decent living while at the same time conserving the

base of craftsmanship, which is India’s cultural heritage. All schemes designed for providing

employment generation has inherent problems due to their top down approach. It is advisable to

draw from the population, segments that are likely to remain in the village for provision of

upgraded technical training. This is the only way to localize technical skills in the village and

make it self-sustained (Planning Commission, GOI, 2011)

The shape of global manufacturing supply chains has changed dramatically with the application

of computers and telecommunications whereby disaggregation of components of industrial

activities can be carried out at different locations. This is transforming the landscape of

manufacturing by reducing the domination of large scale enterprises and increasing the

contribution of MSMEs. Increase manufacturing sector growth to 12.0–14.0 per cent over the medium term to make it the engine of growth for the economy. The 2.0 to 4.0 per cent differential over the medium termgrowth rate of the overall economy will enable manufacturing to contribute at least 25.0 percent of GDP by 2025. Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2025. Sectors that will create large employment include: Textiles and Garments, Leather and Footwear, Gems and Jewellery, Food Processing Industries and Handlooms and Handicrafts. MSME sector should become the base for the Manufacturing Sector—employment and enterprise generation(Planning Commission, GOI, 2011).

During the post reform period, despite economic growth there is low labour absorption in the

Indian economy. A need to evolve a multistage strategy to generate more and more employment

opportunities was recognised. The measures included in this strategy are: Employment

generation to be the single most important criteria for investment policy, although profits and

technological updating to be given due weightage. Constitutional obligation ensuring “Right to

Work” should be the function of economic planning and The Government get, money through

disinvestments of PSE shares, it is quite appropriate that the money should be used to develop

new and viable industrial units, and this money should not be used to finance budget deficits or

any other Government expenditures. The challenges for employment generation are recognized

to be corruption, Political Rivalry, gap between policy planning and implementation, Illiteracy,

Role of private sector and reservations. The opportunities identified for employment generations

include huge workforce, economical workforce, transparency and liberalization of exchange

policies(Shukla and Mishra, 2013).

5.4. Sectoral Contribution to India’s GDP and Employment

Following Table-1 shows the the trends in the growth of GDP and Employment sector wise

(Chitra.R, 2006) between 2005 and 2012. The share of agriculture has shown only a small

decline in this period from 20% to 17% in GDP but the employment share remains stagnant at

52-53%. Non Agriculture contribution to GDP has shifted from Industry to Services dominated

but employment share has not shifted in line with this. This may be due to the high value

addition in Services or the supply gap of employable people to services.

Table 1: Comparison of Sector wise GDP and Employment shares in 2005 and 2012

Year Agriculture Industry Services Total%in GDP %in WF %in GDP %in WF %in GDP %in WF

2005 20 52 26 34 54 14 1002012 17 53 18 19 65 18 100

The employment in India has grown at a CAGR of 2% till 2002 from 1978 which itself is a

commendable achievement as compared to many nations. However the declining trend in this

growth rate since 2002 is a matter of concern.Following Table-2 shows a comparison of sector

wise employment in BRIC countries. China with almost equal distribution of employment in the

three sectors has balanced and continues to grow at highest rates consistently in the world. Brazil

and Russia like India has unequal distribution. But India has an opportunity. It has 52% in

Agriculture and the labor has to be migrated to higher value added sectors of Industry and

Services. Brazil and Russai have not this opportunity. India can transfer considerable agriculture

employment to Industry and from there to Services to can reach the growth rates of China.

Table 2: Sector wise Employment comparison in BRIC nations

Following table showing the share of subsectors in employment generation indicate thatt

employment creation potential lies with manufacturing, finance, utilities, trade and community

and personal services. Non farm sector with about one-third contribution to employment and

over 60 per cent in GDP, is an important segment of the rural economy of India (Papola TS &

Sahu PP). Employment in non-farm segment of the rural economy was distributed equally

between the secondary (industry) and tertiary (services) sectors. Manufacturing constituted the

largest segment of the rural non-farm employment with 22% followed by trade as the second

largest activity accounting for 20 per cent of non-farm employment.

Table-3: Comparison of GDP and Urban and Rural employment growth rates sub sector wise

Sector GDP Growth rate(GGR)

Employment Growth Rate(EGR)

EGR(Urban)

EGR(Rural)

1993-

2004

2000-

10

1993-

2004

2000-

10

1993-

2004

2000

-10

1994-

2004

2000-

10

Primary 2.51 2.33 0.26 (0.05) 0.05 1.61 0.69 (0.19)

Mining 5.02 4.46 (0.02) 0.61 (0.7) 0.53 0.26 3.65

Manufacture 6.7 7.97 0.47 0.25 3.61 3.21 2.74 0.62

Utilities 5.7 5.69 (0.32) 0.37 (0.51) 2.47 (3.82) 1.51

Construction 7.63 9.2 0.94 1.06 5.56 5.64 8.27 12.04

Secondary 6.68 7.78 0.59 0.60 3.8 3.79 4.11 5.34

Trade 8.64 8.67 0.61 0.3 5.52 1.98 4.88 3.41

Transport/Communication

10.57 14.5 0.49 0.25 4.13 3.06 6.56 4.44

Finance/Real Estate / Bus.Services

7.29 9.47 0.99 0.81 7.55 8.3 6.13 5.20

Community/Personal Services

6.53 6.58 0.06 0.28 0.65 2.66 0.08 0.77

Tertiary Sector 8.0 9.35 0.43 0.30 3.56 2.92 3.2 2.77

All Non-

Agriculture

7.54 8.84 0.48 0.41 3.65 3.23 3.64 4.03

Total 6.27 7.52 0.29 0.20 3.27 3.10 1.4 0.96

Source: Own Table rebuilt from Tables 2, 3, 4 and 5 of study paper by Papola TS & Sahu PP

5.5. MSMEs and Employment generation

SMEs represent on average about 66 percent of permanent, full-time employment in developing

countries. SMEs in this study were defined as firms with 5-250 employees(International Finance

Corporation,2013). However, in developing countries small firms are still significant

contributors to employment growth, even after controlling for age. In fact, small firms, especially

those with less than 100 employees and mature firms (particularly those in operation formore

than 10 years) were found to have the largest shares of total employment and job creation.13

Furthermore, even whencountries experienced net job losses in the economy as a whole, only

small firms,14 especially small and mature firms, had net job gains Small firms (5-19 workers)

in developing countries had the highest job growth rates overa two-year period (18.6 percent),

about twice the job growth of all firms. Thus, both sources identify small firms in developing

countries as having the highest job growth rates conditional on survival.

In OECD economies MSMEs account for over 95% of firms, 60-70% of employment, 55% of

GDP and generate the lion’s share of new jobs. Well-managed and healthy SMEs are a source of

employment opportunities and wealth creation for any nation. Majority of SMEs in countries in

transition are microenterprises employing family members or close relatives. Following diagram-

1 shows the massive contribution of MSMEs to employment in developed as well developing

countries. Noteworthy is the increased percentage through employment and GDP in high –

income countries. In Indonesia 90% of workforce, especially women and youth – are in MSMEs,

in Malaysia they contribute 32% to GDP, 56.4% to Employment.

Diagram-1: SME contribution to employment and GDP

More than 99 percent of U.S. businesses are SMEs and they account. Of these total SMEs,

service firms contribute to 88 percent. SMEs in US are in businesses like real estate and rental &

leasing service, whole sale trade. Japanese SMEs contribute to more than 99% of nation’s total

business. This has resulted in employment for majority of the population and accounted for a

large proportion of economic output. The sectors include retail business and service

industry(Viral M. Pandya). SMEs having gained importance in the developing economies,

become advantageous being economic enterprises having the capability of quick adjudication,

working with less capital but more intense labor and having low cost of management and thus

having cheap production. Empirical results indicate that the size of the SME sector has a

nonlinear relationship with economic growth. In countries in which SMEs employment accounts

for less than 59.75% oftotal employment they have negative relation with a growth and in

countries in which SMEs employment accounts for more than 59.75% of total employment they

contribute positively.“Mittelstand,” by which name Germany’s SME segment is known as,

accounted for 52% of Germany’s economic output in 2010. whereas large firms cut jobs between

2008 and 2011 (-2.4%), the Mittelstand increased employment by 1.6%.1 In the U.S., SMEs

accounted for 65% of net new job creation between 1993 and 2009.The impact on the overall

economy is even greater because new jobs created by SMEs further create more jobs, referred to

as the employment multiplier, which for some industries like manufacturing could be close to

three. MSMEs world wide become crucial for a nation’s growth owing to its advantages of

employing low skilled Lbor, women and youth, being bridge for transforming agro-dependent

economies to transform into industrial and service-oriented economies, by becoming the link in

the supply chain for large multinationals (Rhama Parthasarathy).

5.5. Indian MSMEs and Employment Generation

Following tables give a bird’s eye view of Indian MSME sector ( Prime minister’s Task

force,2010). Following table and figures are extracted from annual report of Ministry of MSMEs

for 2011-12. In India the contribution of MSME sector to manufacturing output, employment

and exports of the country is quite significant. In terms of value, it accounts for 45% of the

manufacturing output and 40 percent of the total exports, employing around 73.2 million people

in over 13 million units throughout the country. Thus, MSMEs are important for the national

objectives of growth with equity and inclusion (Ramarao Ravulaparthy,2013).

Table-2 : MSME broad detailsS.No Parameter MSME details 20111 GDP 8%2. Export 40%3. Manufactured output 45%5 No. of Units 31.1 million6 Employment 73.2 million7 Employment growth 5.29%8 % of Manufacturing Units 67%9. % of Service sector units 33%10 Avg.Employed(un Regd.) 2.0511 Avg.Employed 5.93 nos.12 Rural Enterprises 45%13 Employment/lac investment 0.185

A report of national Knowledge commission indicates SMEs registering a greater increase in

Innovation Intensity(i.e. the percentage of revenue derived from products/services which are less

than 3 years old) than large firms (National Knowledge Commission).

6. Discussion

From the literature review it is clear that the existing growth model being followed by India is

flawed and has to be modified. Being a labour abundant economy it cannot imitate the growth

models followed by developed nations which are Services dominated due to their matured

economies. Neither can we follow Chinese model as it is as we have higher educated population

which was included in the growth process thus far through our services led growth, albeit, mostly

depending on foreign company contracts and less on domestic consumption. Now we have

reached a stage where services is saturating if merely based on foreign contracts. We can also

further observe that this model of growth during the last decade was more urban in nature and

was not inclusive. Over and above this, the nature of growth was that it created negligible

average employment growth at 0.3%p.a. over the decade, in spite of 7% average growth rate till

2011. Further the growth hs fallen to sub 5% in 2013 and 2014. For a labor abundant country like

India now this growth model needs a relook .

An out of box thinking is the need of the hour for choosing a revised growth model. It has to

reverse the growth trend and put back the economy on the path of average 7% growth in the

short term and sustainable growth rate for long years to come. This is possible by making

employment generation to be the engine of growth. Jobs can be created direct, indirect or

induced means. An India specific growth model is required. A study of various employment

generating models worldwide and India’s past years can help in developing this model. An out of

box thinking necessarily does not mean dumping the old. It aims at taking the good from the

existing model and new thinking and arrive at the best of the mix that fits the requirement.

Studies in the above literature review has thrown open the truth that MSMEs should be the

drivers in making this possible as they are the growth engines for employment generation across

genders, regions, sectors and skills. They contribute a lion’s share of a nation’s employment

generation spreading across rural and urban canvas with wide presence spread across sectors in

agriculture, manufacturing and services employing low skilled labor, women and youth. New

jobs created by MSMEs further create more jobs, referred to as the employment multiplier,

which for some industries like manufacturing could be close to three

Following salient aspects which can be the steps/corner stone for a sustained employment

generating growth model.

a. Growth through industrialization helps long-run poverty reduction.

b. Policies focusing on productive factors that the poor possess viz. raising returns to unskilled

labor, use of labor intensive methods in place of capital intensive methods, promoting

development of rural non-agricultural activities like production in MSMEs may decrease this

disparity. Industries employing a high proportion of unskilled workers and/or use domestic

inputs and raw materials produced with labor-intensive technologies can have positive effects

on incomes of the poor.

c. Creation of large number of economic activity can provide avenues for people to work and

earn a decent living for themselves and their families, thus initiating true economic

development

d. Emphasis to be laid on suitable mix of agriculture, industries based on agri-processing in

rural areas through value addition, manufacturing in urban areas and labor intensive services

in rural/urban areas along with value added high technology knowledge based industries and

services will help solve the problem. This will lead to inclusive growth by generating

employment across the board.

e. Converting threats like climate change and ageing population worldwide into opportunities

for using the abundant labor and knowledge resources in India.

f. Take necessary policy and implementation steps on both supply side and demand side to

remove anomalies and boost employment generation

g. Identify new areas/sectors and measures to create employment. Some of them could be

Manufacturing, Health/Life sciences and Green Economy, Agri‐Food, ICT Hardware and

Software, Cloud computing, Textiles and Garments, Leather and Footwear, Gems and

Jewellery, Food Processing Industries, Handlooms and Handicrafts, Digital Games, Tourism,

International Financial Services, Business Process Outsourcing/Shared Services, Education

Services, Construction, Retail/Wholesale, Arts, Culture and Creative Enterprises.

h. China with almost equal distribution of employment in the three sectors has balanced and

continues to grow at highest rates consistently in the world.

i. A new structure has to be created for enabling the implementation of the policies stated

above.

j. Single window clearance and access to finance, technology and other resources should be

made easier for MSMEs

k. The growth objectives remaining the same, suitable modifications to be allowed at states and

district levels to choose the drivers of employment generating sectors/modes to suit their

local conditions.

l. MSMEs should be encouraged to become a part of global supply chains to take advantage of

the local skills and resources and exploit global opportunities,

m. Local innovations and simple technologies created locally should get encouragement and

financial assistance.

n. Micro industries should be given maximum preference for financing and agencies like Khadi

and Village industries council should be made the nodal agencies for the implementation

o. Funding Self Help groups will encourage women employment

p. The development and transformation of the rural economy requires rapid expansion of

employment and income opportunities, both on farm and off farm. This requires

improvement of rural infrastructure, supporting rural livelihoods, education, healthcare and

skill development.

q. Suitable amendments to existing employment generation schemes like MGNREGA and

NRLM to include infrastructure creation and craftsmanship creation among rural artisans.

r. The challenges for employment generation are recognized to be corruption, Political Rivalry,

gap between policy planning and implementation, Illiteracy, Role of private sector and

reservations. The opportunities identified for employment generations include huge

workforce, economical workforce, transparency and liberalization of exchange policies

s. Involve Panchayat Raj institutions as partners in rural employment initiatives by involving

them as nodal agencies in skills imparting, infrastructure creation etc.

t. Dual vocational training systems that combine classroom with on-the-job training work best

solution for this problem. Germany has successfully implemented this.

7. Conclusion

As the existing growth model ceased to be relevant for India/s sustained and employment

oriented requirement a relook is needed. An out of the box approach is to revise the growth

model itself suitably. After a thorough study of different models worldwide it is found that the

new growth model to be followed by India should be more employment generation oriented due

to it labor abundance. The model should ensure that aricultural productivity, agri-processing,

rural employment generation through non-farm activities, manufacturing revival and labor

intensive services occupy the dominant place in the revised growth model. Infrastructure and

skill development are the key requirements. MSMEs are the engines of employment generation

and all necessary e to encourage them should be in place. Domestic focus along with

international trade is the required mix for both manufacturing as well services.Policy formulation

along with effective and speedy implementation ensuring inclusive growth are the sure shot ways

India can reenter the high growth path through employment generation in a sustainable manner.

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