Unlike many other countries, small enterprises in India remain small and even shrink. Bring out the factors responsible for such a trend in India. What steps have been taken by the government in this regard? (150 Words)

Mentors Comment:
Explain the scenario regarding small enterprises in India.
Make a comparison with other countries.
Bring out the factors responsible for such a trend.
Mention some reform measures taken by the government.


According to study done by Hseih and Klenow (2011), surviving small firms in USA grow spectacularly; in Mexico grow moderately while in India they shrink. Within the MSME the medium firms are almost of negligible percentage with almost 95% micro, 4.8% small and 0.2% medium. This is strange considering the long-time sector has been supported by the government notwithstanding the fact that a separate ministry was established in 1954. It indicates the too many firms in India remain small, unregistered, informal and shrink rather than increase in size and operation.

Following factors can be the cause of this phenomenon:
 To avoid regulations and taxes firms try to remain small-they hire temporary workers due to strict labor laws and don’t have much incentive to invest in skill up gradation; they don’t make capital investments and technology up gradation so that to avoid tax net- all these factors results in low productivity.
Moreover, small scale of operation adds to their disadvantage. As a result they have little incentive to grow. Hence, they either stay small or further shrink.
India’s low rank on ease of doing business (132/173) indicates that continuing business in India is an arduous task. Many processes especially at state level are too cumbersome and delaying. Thus it is distinctly demotivating to expand business.
 An easy exit from loss making business releases the capital, which can be invested elsewhere to expand business. A complex process of exit in India acts as a disincentive.
 As soon as the business migrates from micro and small to medium and large, almost all the governmental perks are lost.
 Most government schemes like PMEGY or Deendayal Upadhyay Antodaya Yojana focus on incentivizing starting of a business but don’t incentivize operation and up scaling of business.
 Lack of financial access to small firms. Further, getting loans from a bank for a startup is easier than for operational expenditure.

Unfortunately, successive governments have failed to address this issue. While most of the schemes continue to promote micro and small enterprises little has been done to support the upscaling of small firms. However, some reforms taken by the government have considerable potential to arrest this trend.

Some of them are as follows:
Make in India: It is expected to bring capital investment in the manufacturing sector in which
most of the small firms operate.
Shramev Jayate: Labor reforms and self-certification will help in reducing the bureaucratic hassle and exploitation of small firms. Apprenticeship programme under the scheme is expected to provide low paying small firms with technically skilled manpower.
MUDRA: Will help in providing finance to small enterprises through MFIs etc.
Credit Linked Capital Subsidy Scheme (CLCSS) for technology upgradation of micro and small enterprises.
Micro and Small Enterprises – Cluster Development Programme to develop a cluster of small enterprises producing similar types of services and goods.
National Skill Development Mission will also benefit the small enterprises in improving their productivity.

However, government needs to give this trend separate focus and try to bring in reforms specially for up scaling of firms in the problem areas of labor laws, tax exemption, technology support, capital availability, and FDI etc. A movement from small to medium and large enterprise will improve the productivity of firms and also arrest the casualisation of workforce and better use of demographic dividend.

1 Comment
Newest Most Voted
Inline Feedbacks
View all comments
3 years ago

I’m new to the programme and am unable to find any button/link for uploading the answer pdf.
Kindly help.