In July last year, the previous Narendra Modi government introduced a Bill - The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 - in the Lok Sabha to change  basis of defining  Micro, Small and Medium enterprises (MSMEs) from 'investment in plant and machinery and equipment' to 'annual turnover'. It was hailed as a game changer because the amendment allowed MSMEs to invest as much as they want to modernise their plant and machinery, without the fear of being denied incentives that come with the small or medium tag. It was also claimed that the change in norms of classification will enhance the ease of doing business and the consequent growth and will pave the way for increased direct and indirect employment in the MSME sector of the country.

The Economic Survey 2018-19, released today, has proposed a reform that goes a step further. It says that even the size-based categorisation for incentives may not be good, as growing beyond the MSME size can only trigger faster economic growth and higher job creation.

Terming all perpetually small firms i.e. firms with less than 100 workers despite being more than ten years old as dwarfs, the Survey states that even though such firms account for more than half of all organised firms in manufacturing by number, their contribution to employment is only 14 per cent and to productivity is a mere 8 per cent. It wants all size-based incentives to be phased out by introducing a sunset clause of less than ten years with necessary grandfathering.

FULL COVERAGE:  Union Budget 2019

The survey, the maiden effort of chief economic advisor K V Subramanian, prefers large firms (more than 100 employees) over the 'dwarfs' as they account for three-quarters of such employment and close to 90 per cent of productivity despite accounting for about 15 per cent by number. According to the Survey, small firms find it difficult to sustain jobs they create while large firms create permanent jobs in larger numbers. It also prefers young firms (less than 10 years) claiming that such firms create more jobs at an increasing rate than older firms do. "Size-based incentives that are provided irrespective of firm age and inflexible labour regulation, which contain size-based limitations, contribute to this predicament," it argues. According to Subramanian, job creation in India 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.

It is too early to say whether the government finds merit in Subramanian's argument or not. However, the fate of MSME Bill speaks volumes about the kind of pressure the government may face if it decides to go ahead with the plan proposed in the Survey. The MSME amendment Bill was referred to a Parliamentary Standing Committee in October, which submitted its report in December 2018. But, the Bill got lapsed as the government's term got ended months later. It was one of the most anticipated Bill as far as the organised industrial sector was concerned as they had maintained that the ability to invest big in units with less turnover helps create better global supply chains.

The new government may introduce the Bill again, but it was known that the pressure from lobby groups that share the ideological lineage of the ruling party was behind the delay getting the Bill cleared. If that is the case, the roadblocks before MSME (Amendment) Bill are far from over.

The change suggested by Subramanian is far reaching in its scope as it will end up dis-incentivising MSMEs that cannot grow in size. A problem too big for the government to ignore.