Micro enterprises need exclusive treatment

Atul Sarma/Anjali Tandon | Updated on April 23, 2021

Considering their huge numbers and heterogeneity, applying the umbrella policy for MSMEs isn’t serving their interests

Micro enterprises are identified from the survey-based information captured by National Sample Survey Organisation (NSSO), a key data-collection agency of the government. It is dissatisfying that the same schedule is used to seek responses by clubbing micro enterprises with small and medium enterprises (SMEs), which collectively are referred as MSMEs.

In 2007, the Ministry of MSMEs was formed in recognition of their distinctness from the large firms. For most part of the policy and stimulus package, the incentives and relief are designed as common across MSMEs bringing them under one umbrella. This tends to bypass micro enterprises even if they are overwhelmingly predominant in the collective group of MSMEs.

Consequently, a clear understanding of the huge heterogeneity, characteristics, constraints and other attributes, which are critically important for policy design, is just not possible. Nor does the umbrella policy for the MSMEs have much relevance for micro enterprises.

Latest available NSSO data show that manufacturing-based micro enterprises constitute 99.7 per cent of the MSMEs while supporting 97.5 per cent of employees. The micro units account for 90.1 per cent of the MSME output and 91.9 per cent of income. A similar pattern is observed for the service-based micro enterprises that also happen to be twice as much (in number) the micro-sized manufacturers.

The micro enterprises have lesser employees (typically up to 10), are started with low capital and have relatively localised market. Even more distinct is their asset ownership pattern vis-à-vis SMEs. A high proportion of the fixed assets of the SMEs are owned. This is in contrast to the ownership pattern of micro units, where fixed assets are more dispersed between the owned and hired, with the latter accounting for around one-third (see figure).

The share of hired assets is even higher for services. This is in sharp contrast to a much lower share of hired assets under the SME segment. Heterogeneity in the form of greater use of hired assets under the micro segment can be interpreted in two different ways. First, the ability to own capital is low, also implying that rental expenses constitute a higher share in total costs.

Second, greater use of hired assets indicates that capital loans for machinery and equipment may not be sought after. It could be the case that a micro-enterprise is unwilling to invest in view of the risks associated with market uncertainties. Very often, capital loans are used to stimulate growth of the MSMEs; this could have little relevance for the micro-enterprises. And, evidence for the same is not too far in the past when there were few takers of the Covid stimulus package.


Vulnerable segment

Undoubtedly, micro enterprises represent the most vulnerable segment. These were the major victims of both demonetisation and the sudden lockdown to contain Covid-19. These enterprises are omnipresent in the business environment around us. A craftsman, weaver, food processor, fisherman, carpenter, shoe-maker/cobbler, tutor, tailor, plumber, electrician, street side food shop, ice-cream parlour, beauty salon, motor (repair) garage, transport agency, advertising entity are just a few examples.

Notably, most of these are service-based. Their presence in high numbers makes them the most diffused segment in our socio-economic system. Therefore, micro-enterprises are distinct in the variety of activities and characteristics, but low in economic contribution. Nevertheless, these enterprises are hugely consequential for the marginalised sections bypassed by the development process. Their existence is compelled by subsistence necessities of a workforce which has no access to training and formal jobs. Despite supporting a large proportion of the workforce, they lack a lobby to voice their concerns simply because of a fragmented structure.

The heterogeneity vis-a-vis the SMEs also gets underscored from wide difference in their incomes. The income per enterprise of a manufacturing SME is 26 times that of a micro enterprise. Similarly, income per enterprise of a service SME is 14 times higher.

The asset ownership pattern has implications for technology upgradation. Greater use of hired assets inhibits technology upgradation. Embracing technology in the micro units has a different context, at least in the present. Technology refers to doing things more efficiently, not necessarily the best and high-tech method.

To illustrate, a small food-selling outlet can be facilitated through better kitchen technology (vegetable cutters, packing machines, fuel saving) and the adoption of practices for improved hygiene and sanitation; a fisherman would benefit from digital connectivity for price discovery and access to a deep-freezing utility; plumbers, carpenters, electricians and beauticians gain from training; while craftsmen require aggregators, textiles units need market access through information; transport agency requires real-time information on routes and passenger traffic, and an advertising entity benefits from printing and installation equipment.

All this clearly suggests the type of information within the diverse micro-segment that is required to design trade-wise policy for effective solution.

Foremost is the need to acknowledge that serving micro-enterprises and SMEs through a common policy does not meet the needs of micro units. In fact, the RBI expert committee report on MSMEs documents that micro (and small) enterprises have limited bargaining capacity. They also fear retaliation from buyers in response to raising the issue of delayed payments.

The earlier set-up, Micro and Small Enterprises Facilitation Council (MSEFC), was also found to be differentially effective in addressing their payment concerns. In another attempt to expedite the settlement of payments, an online portal, SAMADHAN, was launched. Here again, the awareness of micro-enterprises was found inadequate. Similarly, these units are disproportionately disadvantaged when it comes to participating in public procurements due to a limited understanding of the procedures and low volumes.

With a greater role envisioned for MSMEs in the $5 trillion economy by 2024-25, it is important that the micro segment is not left behind. Their inclusion is contingent upon recognition of the uniqueness for policy design. The first step would be to gather information recognising their uniquely diverse attributes.

Despite a dedicated ministry, this recognition for data collection on micro-enterprises is conspicuous by its absence. Subsuming them into the wider MSMEs amounts to losing their individuality. Consequently, addressing their concerns through blanket polices for the MSMEs amounts to a one-size-fits-all approach. A thoughtfully crafted and focussed approach towards micro-enterprises for gathering and capturing specific information is an inevitable consideration for the New Industrial Policy.

Atul Sarma is former Member, Thirteenth Finance Commission, and Anjali Tandon is Associate Professor, Institute for Studies in Industrial Development

Published on April 22, 2021

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