The share of the manufacturing sector in the gross value added of the Indian economy fluctuated between 17 and 18% for the decade 2011-2021. By comparison, China had 27%, South Korea 25% and Bangladesh 18.5%. cent for 2020.
Higher growth of manufacturing activities in the economy becomes important for two reasons. First, the sector provides jobs and can absorb workers with a variety of skills. Second, the ability to export manufactured goods plays a crucial role in maintaining an economy’s external balance and influences global trade prowess.
A vibrant and growing manufacturing sector is crucial to India’s economy on both counts. However, the emergence of the manufacturing sector as an engine of growth, with a higher share in gross value added or national income, is hampered by a structural characteristic of the sector, namely the preponderance of a large number of small enterprises , companies and factories.
Although these companies help to provide jobs, their growth and transition to large enterprises are hampered by various factors. Addressing these factors requires a comprehensive policy approach that also takes into account the linkages between small and large businesses.
Data released by the Central Statistical Office in the Annual Survey of Industries for 2017-18, the most recent year for which final results are available, reveals some important features of the manufacturing sector – 55.3% of total working factories produce output less than ₹5 crore per year and 31.2% of factories produce output between ₹5 and 50 crore per year.
This classification, based on production, corresponds to the recent definition of micro and small enterprises based on annual turnover. Thus, 86.5 percent of factories meet the definition of micro and small enterprises. However, in terms of share in employment and output, this group accounts for 40 and 14.4 percent respectively. Large factories, with an output of more than ₹500 crore per year, account for only 1.89% of the total number of factories, but hold 22% of employment and generate 54% of total output.
In terms of invested capital, we find that 66% of factories have capital investment of less than ₹0.25 crore and they contribute 13.5% of total production. Only 11% of the factories have a capital of more than ₹10 crore and their share in production is 73.5%. It is to this imbalance that we alluded earlier.
In other words, in the manufacturing sector, we find that a large number of small factories contribute only a small share of the total production of the sector and that less than 2% of the large factories account for more than 50% of the production of the sector. . This skewed structure, in our opinion, needs to be corrected for the sector to grow at a faster pace.
Data on MSMEs
Given the unique position of micro, small and medium-sized enterprises (MSMEs), as an important segment in terms of worker absorption, their share in overall value added is often estimated at one-third. This is an approximation at best given the range of activities undertaken by MSMEs and the extent of informality present in the sector. Furthermore, the unavailability of data also hampers a realistic assessment of the extent of linkages that MSMEs have within the economy.
In a manufacturing ecosystem, MSMEs have crucial links with larger companies through subcontracting agreements and the supply of inputs. Encouraging and supporting such linkages is an important ingredient of business development models that can change the landscape of manufacturing.
Integration of MSMEs
Attempts to integrate MSMEs into large firms have been at the center of industrial policy reforms in many industrializing economies for some years. For example, in Malaysia in 2019, as part of its goal to increase the contribution of SMEs to reach 41% of national GDP, its Ministry of Entrepreneurship Development (MED) devised new strategies to boost the growth of SMEs. SMEs, especially in key industries with high multiplier and linkages. In this context, efforts have been intensified to further improve and strengthen trade links, in particular between SMEs and large companies.
With the availability of relevant SME data in Malaysia, it was found that in terms of consumption of output by other industries and end consumers, 48.5% of total SME output returns to the economy. as an intermediate input, indicating that SMEs are highly integrated at the national level with other industries. A similar analysis in the Indian context is hampered by the lack of data.
However, given the myriad of activities that MSMEs undertake in India, it would not be entirely inappropriate to assume a similar close connection between MSMEs and other businesses, which underscores the need to consider MSMEs at the same time. time than large companies and that their growth is influenced by the growth of large companies.
Plagued by the lack of consistent data on MSMEs, we assess the importance of linkages through an indirect method, which is illustrated in the table. We classify industrial subgroups (within a major group) into two sets of industries based on the nature of the products produced.
The first set of industries are referred to as “supplier” industries, i.e. they produce parts and components and intermediate products and the second set are referred to as “purchaser” industries, which produce final goods.
Take the broad industry group of ‘Motor vehicle, trailer and semi-trailer manufacturing’, in which we identify ‘Motor vehicle parts and accessories manufacturing as a supply industry’ and “Motor Vehicle Manufacturing as a Purchasing Industry”; 86% of factories are in the supply industry, only 3% in the purchasing industry.
The differences in size and scale are also striking. Given that the market of 86% of companies (which belong to the category of suppliers) depends on 3% of the factories (mainly the largest ones) of the category of buyers, the growth of the former depends enormously on the latter. The slowdown in the growth of large companies would then be transmitted with an amplified effect to small companies.
To strengthen the ties
There is plenty of research evidence to confirm that forming alliances and networks helps small businesses grow, cooperate and compete with larger companies. The policy approach must focus on encouraging companies to work together so that they can reap the benefits of collective efficiency. The key to success would be the ability to develop a mutually supportive approach with cumulative effort and continuous improvement rather than seeing big and small differently.
Perceiving small and large companies in separate silos could prove costly in the long run, as slower growth of large companies could stunt the growth of others.
Rangarajan is former President, PMEAC and former Governor, RBI; Babu is Professor, IIT-Madras
July 12, 2022