Indian economy full of dwarfs: 77% firms deploy less than 40 workers; 92% have less than 100 employees

Representational Image. A worker cuts metal inside a workshop manufacturing metal pipes in Mumbai.

At least 77 percent of the Indian firms and establishments in key sectors are employing less than 40 workers and sectors like trade and financial services have a higher percentage of such firms, indicating the dwarf nature of the employers’ ecosystem.

As of September 30, 2021, while 94 percent of the employers in the financial services space deploy less than 40 workers, it is 89 percent for the accommodation and restaurant sector, and in trade, it is almost 80 percent, according to the latest data from the union labour ministry.

If you take 100 employees as the cut-off, then the number of establishments with less than 100 people is a massive 91.7 percent, data analysis of the quarterly employment survey (QES) for the second quarter of the current fiscal, showed.

“Small Indian companies and establishments have enjoyed fair amount of government support, but have not grown as much. If you look at the number of firms that deploy 500 or more workers –the overall number is 1.4 percent. Among key sectors that the QES have taken, only the IT and BPO sector has 12.3 percent establishments with 500 or more workers,” said a government official who declined to be named.

As per the QES second quarter data, very few establishments have been found in the three higher size classes of establishments, deploying 100-199 workers, 200 – 499 workers and more than 500 workers. And their respective shares were pegged at 4.1 percent, 2.8 percent and 1.4 percent, respectively.

At the sectoral level, all the sectors showed that around 50 percent of their establishments are in the size class of 10-39, meaning they are deploying between 10 and 39 workers. Among the select nine sectors, the IT/ BPOs sector recorded a higher share of establishments in the size classes 100-199 workers (12.2 percent), and more than 500 workers (12.3 percent).

To be sure, the QES focused on nine key sectors --manufacturing, construction, trade, transport, education, health, accommodation and restaurant, IT/BPO and financial services—and surveyed 11,500 companies and establishments during July-September 2021.

“The dwarf nature of a large portion of the companies is not good for the economy. There are several reasons for such a scenario including the desire to stay non-compliant because the compliance burden is huge. Despite the rhetoric, we as a system, are not adequately supporting the manufacturing ecosystem,” a second official said who has earlier worked with the union MSME ministry.

Ramakant Bhardwaj, a former national vice president of Laghu Udyog Bharti, a federation of micro and small companies, said Indian firms staying small can be attributed to three key reasons – lack of capital support, government policies and compliance burden, and a desire to stay small to avoid over-regulation.

“Traditionally, financing to small companies have been low, and financial institutions look at them with doubt. Second, government policies for decades looked to over-regulate companies, did not offer the flexibility in operation and hiring. So how to avoid it – entrepreneurs opened new firms instead of growing an existing one and this largely contributed to the number of tiny firms spread faster,” said Bhardwaj. He, however, said that things are slowly changing and the new labour codes are progressive and regulatory mechanisms are also improving.

The Economic Survey 2018-19 had pointed to unshackling of the small firms. It had underlined that micro, small and medium enterprises that grow not only create greater profits for their promoters but also contribute to job creation and productivity in the economy.

“Our policies must, therefore, focus on enabling MSMEs to grow by unshackling them. Job creation in India, however, suffers from policies that foster dwarfs, i.e. small firms that never grow, instead of infant firms that have the potential to grow and become giants rapidly,” the economic survey had said.