Starting small, staying small

It is surprising how much the government talks about growth, but how little it actually does about it. Take the latest Budget, for instance. Finance Minister P. Chidambaram kicked off his Budget speech with these rousing words about the importance of growth: “Growth is a necessary condition and we must unhesitatingly embrace growth as the highest goal. It is growth that will lead to inclusive development, without growth there will be neither development nor inclusiveness.”

Quite true. Even Stalinist apologists cannot argue with the contention that the end goal of even an Stalinist programme of ‘planned development’ was development — and, presumably, growth.

But when it comes to policy, this fascination for growth somehow mysteriously vanishes. If you look at the way policy is structured, and analyse the way fiscal policy incentives are offered, there is, more often than not, an implicit incentive built in to them to actually spurn growth and stay small.

It is not as if the government does not know this. The Economic Survey, released just before the Budget, and widely seen as a wish list of government (and a platform for launching test balloons to check which way the political winds are blowing) laments this fact.

“In India, too many small firms stay small and unproductive and are not allowed to die gracefully,” its anonymous author (it’s the world’s worst kept secret that the author of the Survey is usually the government’s chief economic advisor, but that’s neither here or there!) lamented.

“Too many large profitable firms,” he went on to add, “prefer relying on temporary contract labour and machines than on training workers for longer-term jobs.”

GROWTH DISCOURAGED

The question which no policy maker is answering is: Why? Why is it that most of the firms which come into existence in our country live and die as micro enterprises, while the Apples and Googles and Microsofts of the world can move from the promoters’ garages to world domination in a decade or two? Why is it that an HCL, which developed a personal computer the same time as Apple and relational database management systems before an Oracle, despite the considerable size that it eventually managed to achieve in India, stands nowhere in the global charts?

The numbers tell their own tale. According to the Survey, the micro, small and medium enterprises (MSME) sector as a whole employs about 81 million people across 38 million units in the country.

But a staggeringly large proportion of them — according to Planning Commission numbers, 94.9 per cent of MSMEs in India are micro enterprises, while a further 4.9 per cent are small enterprises. This means that only a vanishingly small 0.2 per cent of MSMEs actually fall into the ‘medium’ category. And only this category, presumably, has the ability to grow into a ‘large’ enterprise, capable of ‘large’ investments, ‘large’ hiring and presumably ‘large’ revenue generation.

To quote the Survey once again, “Too many firms in India stay small, unregistered, unincorporated, largely informal, or in the unorganised sector because they can avoid regulations and taxes.

These firms have little incentive (emphasis added) to invest in upgrading skills of largely temporary workers or in investing in capital equipment that could bring them into the tax net, so their productivity stays low. Low productivity gives them little incentive to grow, completing the vicious circle.”

Topsy-turvy

While it is easy to blame the regulatory maze, or unwillingness on the part of our entrepreneurs to pay taxes, the real issue is that our system of policy measures and incentives is turned upside down. The incentives are there to ensure that a business which starts small, stays small, while the eco system of finance and capital ensures that only a select handful can actually start large, and grow larger with ease.

So, it is not as if the problem is not known. But the solutions are not coming. In the current Budget, for example, the only tangible growth incentive was the 15 per cent investment allowance given for capital investments in excess of Rs 100 crore.

While this has been rightly welcomed as a pro-growth measure, how many of the 38 million MSMEs can ever hope to reach a stage where they will be in a position to do so? After all, the ceiling investment limit for a ‘medium’ size enterprise is capped at Rs 10 crore!

But even this is a half measure. In the Finance Minister’s post Budget meeting with business, one entrepreneur asked that this investment allowance be also given to the services sector, but was firmly turned down. The logic of this escapes one, since, if the government’s stated goal is achieving higher growth, investment and employment, why should it care whether this is achieved by buying more footwear manufacturing machines, or by building modern hospitals?

But clearly, it does. In fact, the Survey (it is a pity that so few of our MPs actually read the document which is supposed to give them an overview of the challenges faced by the economy and help them formulate appropriate policy responses), has a telling table on the government’s list of incentives which end up disincentivising growth.

stay small

From capital assistance to technology and training help to preferential purchase for MSMEs, a host of schemes exist for the small business — provided it stays small.

No wonder that most small industry clusters in our country house a multiple number of enterprises under one roof, all owned and operated by the same persons, so that the so called ‘incentives’ can continue to be enjoyed by them and that they are not punished for pursuing the logical goal of any business — higher growth and profits!

In fact, an unconscious acknowledgement of this syndrome lay in the Budget, where the Finance Minister graciously allowed MSMEs ‘graduating’ out of their class to continue enjoying their incentives for three years after exiting the category!

Our entire system of policy incentives and tax breaks is an inverted pyramid, and practises the opposite of what we preach.

We say we want growth, but incentivise smallness and punish growth. We say we want the rich to pay more taxes, but actually tax the poor through a gargantuan array of indirect taxes (and uncontrolled inflation), while the really rich get an easy ride.

After all, a bulk of the income of the super rich is in the form of dividend income from their shares in their businesses, which is tax free in the hands of the receiver, is by definition long-term and therefore avoids capital gains tax, and can be bequeathed sans estate or death duties to their offspring!

Why not leave the bottom-up approach to tackle the challenge of social equity, and take a top down approach to growth instead?

Response to >Raghavan.s@thehindu.co.in

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