Date : 30/05/2023

Relevance: GS-3: changes in industrial policy and their effects on industrial growth

Key Phrases: Scaling-up Enterprises, Micro Enterprise, Small Enterprise, Small Enterprise, entrepreneurial growth, Mckinsey Global Institute, Limited competitiveness.

Context:

• The absence of mid-sized firms in the Indian business environment is a significant challenge that hinders overall economic growth and development.
• Scaling-up enterprises is crucial as it leads to job creation, spurs innovation, and enhances the competitiveness of industries.

Key Highlights:

• In recent years, India has seen an increased focus on facilitating entrepreneurship through myriad schemes and initiatives.
• With the aim of nurturing entrepreneurship, the government of India launched a flagship initiative, Startup India, in 2016.
• The number of recognised startups in the country has increased from 442 in 2016 to 92,683 in 2023.
• There has also been an enhanced emphasis on funding entrepreneurs. Initiated in 2021, the Startup India Seed Fund Scheme saw ₹477.25 crore being approved for 133 incubators.
• While this is a hugely positive direction that India has taken, these efforts must ensure an important aspect of entrepreneurial growth and development, which is the scaling-up of firms.
• Scholarly work on enterprises in developing nations discusses the absence of middle-sized firms.
• As per the MSME Annual Report of Government of India (2022-23), the micro sector has 63.05 million estimated enterprises, making up for over 99% of the total estimated number of micro, small and medium enterprises (MSMEs) in the country.
• The small sector houses 0.33 million enterprises and the medium sector a mere 5,000 firms.
• Firms are unable to make the transition from a micro to mid-size stage. It is the mid-sized firms which hold greater potential to grow into a large firm.
• According to a report by the Mckinsey Global Institute titled India’s Turning Point (2020), India is home to over 600 large firms that are 11 times more productive than average and contribute around 40% to total exports.
• To be able to attain our development goals, the need to boost the number of large firms in the country cannot be emphasized enough.
• A micro firm faces multiple challenges, ranging from limited access to finance, lesser capacity to undertake extensive research and development, restricted market access, and difficulties in technological upgradation, among others. Moreover, small firms are more vulnerable to the adverse impact of unforeseen events. They may lack resilience owing to a lack of sufficient funds to tide over an economic lull.
• A larger firm is able to contribute more in terms of revenue and employ a greater share of the labour force.

Challenges and Implications of the Absence of Mid-sized Firms in India's Business Environment:

• Limited job creation: Mid-sized firms are major contributors to job creation in any economy. Their absence in India's business environment leads to limited employment opportunities, resulting in increased unemployment rates and a strain on the labour market.
• Lack of innovation: Mid-sized firms are often at the forefront of innovation, driving technological advancements and contributing to overall economic growth. Without their presence, India may experience a slowdown in innovation, hindering the country's competitiveness in the global market.
• Dominance of large corporations: The absence of mid-sized firms can lead to a concentration of economic power in the hands of a few large corporations. This concentration may lead to monopolistic practices, reduced market competition, and limited consumer choice, ultimately hampering economic development and inclusive growth.
• Limited competitiveness: Mid-sized firms play a crucial role in promoting healthy competition within industries. Their absence can lead to a lack of dynamism and competitive pressure, reducing overall efficiency and productivity in the economy.
• Investment and funding challenges: Mid-sized firms often face difficulties in accessing financing and investments due to their smaller scale compared to large corporations. The absence of mid-sized firms in India's business environment can create a funding gap for entrepreneurial ventures, hindering their growth potential and stifling economic development.

Importance of Scaling-up Enterprises:

• Job creation and economic growth: Scaling-up enterprises contribute significantly to job creation, thereby reducing unemployment rates and fostering economic growth. As enterprises expand, they require additional manpower, leading to increased employment opportunities.
• Innovation and productivity: Scaling-up enterprises tend to be innovative, investing in research and development to improve products, services, and processes. This innovation translates into increased productivity, efficiency, and competitiveness, driving overall economic advancement.
• Industry competitiveness: Scaled-up enterprises often become key players in their respective industries. Their enhanced capabilities, market presence, and economies of scale allow them to compete effectively with domestic and international rivals, boosting the overall competitiveness of the industry.
• Supply chain development: Scaled-up enterprises have the potential to strengthen and expand supply chains, benefiting smaller suppliers and service providers. This integration can lead to increased economic activity and improved business opportunities for smaller enterprises.

Measures to Address the Absence of Mid-sized Firms:

• Access to finance: Implement policies and initiatives that facilitate easier access to financing for mid-sized firms, such as dedicated funds, loan guarantee schemes, and tax incentives. This will encourage entrepreneurship, innovation, and business expansion.
• Skill development and entrepreneurship support: Enhance skill development programs and provide entrepreneurship support to promote the growth of mid-sized firms. This includes training initiatives, mentorship programs, and creating a favorable ecosystem for startups and scaling enterprises.
• Regulatory reforms: Streamline regulatory processes and reduce bureaucratic hurdles that often burden mid-sized firms. Simplifying procedures for business registration, compliance, and taxation can encourage the growth of these enterprises and reduce barriers to entry.
• Access to markets: Facilitate market access for mid-sized firms through measures such as trade agreements, export promotion programs, and networking platforms. This will help expand their customer base, increase competitiveness, and encourage scaling-up.
• Collaboration and knowledge sharing: Encourage collaboration between large corporations and mid-sized firms through partnerships, joint ventures, and technology transfer initiatives. Large corporations can provide mentorship, funding, and market opportunities, while mid-sized firms can bring innovation and agility to the partnership.
• Promote regional development: Focus on regional development policies that support the growth of mid-sized firms in smaller cities and towns. This will help decentralize economic activity, reduce migration to urban centers, and promote inclusive growth.

Conclusion:

• The absence of mid-sized firms in India's business environment poses significant challenges and implications for the economy.
• Scaling-up enterprises are essential to address these issues and unleash the potential of micro and small enterprises.
• Simplifying regulations, promoting access to capital, and fostering entrepreneurship are key measures that need to be undertaken to create a conducive environment for the growth and development of mid-sized firms.

Source: Live Mint

Mains Question:

Q. Analyze the challenges and implications of the absence of mid-sized firms in India's business environment. Discuss the importance of scaling-up enterprises and suggest measures to address this issue. (250 Words)