MSME Vs Entrepreneurs: Amid Weakening Global Economies, Who Will Provide More Employment To India?

By 2047, India is anticipated to have 1.1 billion people of working age (15-64) – 1.6 times the population of Europe. However, this demographic dividend benefits only if the country has adequate employment. Otherwise, it may wreak social and economic catastrophe. Suppose India does not produce enough opportunities and its employees are not well equipped for those occupations. In that case, its demographic dividend may become a burden, according to research issued in April 2022 by CII, Harnessing India’s Demographic Dividend for Boosting Growth.

According to the analysis, if India’s working-age population effectively gets employment opportunities, its GDP can rise from $3 trillion to $40 trillion by 2047. However, time is of the essence.

A demographic dividend occurs when a country has more working-age adults than children and older people. In the context of India, this indicates that the government will become the most significant exporter of human resources. This benefit is explained as follows: With a relatively young population (median age of 28.4 years), India has a competitive edge in terms of employment but also the chance to unleash a young population’s consuming power.

However, analysts are concerned that a lack of employment could jeopardize India’s long-term prospects. The CII paper explains how a labour shortage might affect productivity growth. It also presents the issue of skill mismatch. According to the research, just 73 million, or around 13% of India’s 542 million workforces, had undergone any vocational training (including formal and informal) in FY20, and only 3% were officially skilled.

To put this in context, the proportion of formally skilled employees as a percentage of the entire workforce in China is 24%, 52% in the United States, 68% in the United Kingdom, and 80% in Japan.

Dun and Bradstreet’s analysts estimate that India will have 1.1 billion working-age people by 2047 and that the country will need to create 231 million jobs over the next 25 years to support its growing population, redress historical inequalities such as a low representation of women in the workforce, and reduce its reliance on agriculture for employment.

So, who will provide the employment necessary to keep the country thriving and stable – MSMEs or entrepreneurs? This subject is paramount in a country where a highly fragmented labour market and 90% of employees work in the unorganized sector.

The rise of BPOs in the 2000s resulted in the establishment of many white-collar employment, which benefited educated millennials. The emphasis is on creating more manufacturing jobs so that the country’s uneducated and unskilled citizens may find productive employment. This is a sizable population in the country, and failing to employ them might result in many social and economic issues.

MSMEs and their importance.

According to the Dun & Bradstreet analysis, India has over 10.5 crore business organizations. According to the research, many of these are street sellers and non-permanent companies that do not employ employees. When removed, only economically viable units are considered; 95.5% are micro, 4.1% are tiny, 0.3% are medium, and just 0.1% are massive. Established markets have 55% micro-entities, 39% small entities, 4% medium entities, and 2% giant businesses.

Logically, this implies that the government should implement more policies to expand MSMEs, as these organizations can produce more jobs and strengthen the economy. In terms of employment, earlier in May, the Employees’ Provident Fund Organisation (EPFO) data revealed that the organization added approximately 1.39 crore net members in the fiscal year 2022-23, a 13.22% increase from 1.22 crore in FY22.

Considering the data from the Centre for Monitoring Indian Economy (CMIE), India’s employment rate has increased since July 2022, with 15 million individuals joining the workforce in the preceding three quarters, with over 75% finding jobs. According to the recent data from the Periodic Labour Force Survey (PLFS) publicised by the National Statistical Office (NSO), the rate of unemployment for folks aged 15 and 15+ in urban areas fell to 6.8% during January-March 2023, the lowest in over four years, from 8.2% the previous year. In terms of MSMEs, they generated roughly 29% of India’s GDP last year. According to the MSME Ministry’s FY22 report, there are 6.34 crore MSMEs employing 11.10 crore people.

According to Sumit Sarabhai, Business Head-Emerging Vertical, TeamLease Services, the MSME sector is the second-largest job creator after agriculture. The industry has played an key role in creating jobs in rural and isolated locations. Personal and professional services generate the most jobs (10%), followed by textile and garment manufacturers (9.4%), food and beverage manufacturers (7.9%), wholesale and retail merchants (6.6%), hotel services (6.4%), and other manufacturing firms (6.2%).

The information comes from the 73rd round of the National Sample Survey (NSS) performed in 2015-16. According to the report, the MSME sector has created 11.10 crore employment in rural and urban regions nationwide (360.41 lacks manufacturing, 387.18 lacks commerce, and 362.82 lacks other services).

During the Covid pandemic, businesses and jobs were severely impacted. In FY22, 6,222 Udyam-registered MSMEs were closed, resulting in the layoff of 42,662 workers. Similarly, between 01.07.2020 and 31.03.2021, 175 units were shut down, and 724 jobs were lost. However, some industry stakeholders believe that the situation has improved. They claim that MSMEs have progressively produced over 60 lakh employment annually during the previous five years on average. Indeed, in the fiscal year 2021-22, the industry created over 90 lakh employees.

This trend can be attributed to increased digitization in the sector, progressive government initiatives, increased capital investment, and the promotion of Make in India,” says Yeshab Giri, Chief Commercial Officer-Staffing and RT, Randstad India, incorporating that MSMEs must unleash their entrepreneurial drive and leverage the government’s thrust on small entrepreneurs to scale up and fill the “missing middle” of entrepreneurship. Without government assistance, MSMEs confront obstacles that might be difficult to overcome.

The government should consider programmes and initiatives to increase market infrastructure and links, minimize regulatory burdens, give marketing assistance, and assist with technological advancement. Aside from this, initiatives to boost access to capital and help small firms release liquidity will go a long way towards assisting MSMEs. Small enterprises have been plagued by the issue of late payments.

According to Madan Padaki, Co-founder of Global Alliance for Mass Entrepreneurship (GAME), the government has attempted to address the issue by introducing a raft of initiatives in Budget 2023.

Now, the call for entrepreneurs- The startup industry.

The government’s emphasis on startups also appears to have been successful in this regard. It has been advocating for the establishment of a startup environment. Today, India is regarded as having the world’s third-largest startup ecosystem. According to Anurag Jain, who is the Secretary of DPIIT, government-registered startups alone have produced approximately 6.5 lakh employees in the country. By formally registering 50,000 new firms, DPIIT hopes to create 20 lakh new employment by 2025.

Since introducing the flagship digital programme in 2016, the DPIIT has identified 60,000 companies. According to the most recent Economic Survey, DPIIT-recognized companies would produce almost 1.6 lakh employment in 2020, nearly 2 lakh jobs in 2021, and around 2.7 lakh jobs in 2022. In the previous five years, startups have produced more than 9 lakh employees. According to the survey, the number of recognized startups has spiked from 452 in 2016 to 84,012 last year.

Furthermore, roughly 48% of these companies are from tier-II and tier-III cities. This means that startups, like MSMEs, expand employment development outside metropolitan areas. According to the Survey, the pace of employment creation by startups last year was 64% greater than the three-year average. During the pandemic, the startup environment experienced a significant blow. Startups are expected to have laid off 20,000 staff last year.

Who wins the race in terms of getting funds?

A funding winter has just descended on the startup ecosystem. According to a Tracxn analysis, financing for Indian startups fell 75% in the first three months of the calendar year 2012, to $2.8 billion from $11.9 billion in the same time the previous year. Indian startups have a reputation for being more reliant on international investment than their global competitors. Still, MSMEs are more established in sourcing capital from inside the country or through government-backed credit schemes.

MSMEs vs Startups: What’s the difference?

MSMEs and startups share characteristics: a new firm is designated a startup for ten years. After then, it typically becomes an MSME, whether listed or unlisted. While both generate direct and indirect jobs, Sarabhai points out that there is a differential in the sort of company: White-collar occupations are supported mainly by services, whereas blue-collar ones are primarily supported by manufacturing.

MSMEs excel in this area because they provide more blue-collar jobs than startups. According to Giri, approximately 5-10% of MSME employees work in business development, customer service, communications, human resources, and finance. According to industry stakeholders, while large organizations and startups might have a huge workforce on the shop floors, the majority of their staff is involved in white-collar job responsibilities such as finance, marketing, HR, and customer relations.

Regarding recruiting, Sarabhai expects the manufacturing sector to create more jobs due to government efforts. The budget proposal to increase capital spending by 33% to Rs 10 lakh crore will benefit industries such as real estate, infrastructure development, and steel and cement. He claims that this will result in blue-collar jobs. As the government focuses on the four I’s — infrastructure, investment, innovation, and inclusion — over the next 25 years, he believes it will help create more job possibilities in the manufacturing industry.

This large investment is expected to have a multiplier impact on the economy and provide job opportunities in related areas like transportation, logistics, warehousing, and the automobile industry. Furthermore, projects such as airports, metros, flyovers, and motorways will provide numerous chances for skilled, unskilled, and semi-skilled workers in tier 2 and tier 3 cities.

“Based on the hiring intent expressed by these industries, we expect approximately 10-12 million jobs to be created across these sectors,” said Giri of Randstad India.

Inadequate hiring.

While hiring is essential, it is equally necessary to consider attrition.

There has been a decline in recruiting and an increase in attrition among Indian startups. Startup hiring declined by 44% between October and December 2022 compared to the January-March quarter. Furthermore, due to the financing freeze, many people have moved away from startups and into more conventional sectors.

Giri views this as yet another advantage for MSMEs. “Over time, MSMEs hire millions of workers each year and have seen fewer instances of attrition, with an average employee tenure of 2.5 to 3.5 years.” Due to global cost pressures and staff reorganization during the pandemic, startups and established enterprises saw a re-shuffle of 18,000-20,000 personnel. He expects these enterprises to hire between 50,000 and 100,000 people across sectors in the performing industries by the end of 2023.

According to a TeamLease poll, 60% of companies anticipate an increase in employment over the next two years due to the PLI plan. 54% of employers believe PLI is “extremely likely” to encourage investment in MSMEs.

Giri believes that the PLI plan and the government’s focus on helping India become the world’s largest startup ecosystem have helped enhance R&D, investments, and job creation in the last two years. “Companies in the manufacturing, hospitality, banking, pharmaceutical, textile, and allied sectors are now positioning themselves to become the largest providers of global standard products and services.” “Over the next 3-4 years, the scheme will increase hiring by 65-70% in MSMEs and established companies,” Giri says.

How to Generate Employment?

According to analysts, to create jobs in the MSME sector, the government must also scale up 11.6 million micro businesses into small ones, 1.2 million small organizations into medium-sized ones, and 0.6 million mid-sized entities into big ones.

According to Arun Singh, Chief Global Economist of Dun & Bradstreet, this implies a $11.5 trillion investment in fixed assets. Retained earnings typically support 65% of new fixed capital investment spending. As a result, to grow these 13.4 million enterprises, Indian MSMEs require at least $4 trillion in external capital. This is a massive necessity given that India’s gross foreign capital as of 2021 was just $1.3 trillion.

The government must build an environment for favourable MSME financing by promoting alternative financing, and debt financing, urging banks to change to a cash-flow-based lending model, and fortifying the current public digital infrastructure to catalyse employment.

According to experts, there is a need to encourage specialized resource allocation for startups to find and incentivize companies for employment. The government has launched the Startup India programme and many capital-raising funds. However, startups worldwide must be aware of such activities. More focus should be placed on enterprises that manufacture or invest in leveraging or creating indigenous product technology and innovation.

Proofread & Published By Naveenika Chauhan