Small and Medium Enterprises (SMEs) are the backbone of India’s economy. Currently, numbered over 48 million SMEs, the sector had a stable growth pace of 4.5% in the last five years. They contribute to more than 45% of India’s industrial output, 40% of the country’s total exports and create 1.3 million jobs every year.
The SMEs are the employment powerhouse of the country, being the second largest to generate employment. After the agriculture sector, SMEs rank second in fostering employment opportunities. Over 3.02 lakh jobs were generated in the SME sector in the last year.
India’s labour markets have been stuck for the last 20 years with 15% employment in the manufacturing sector, 50% as self-employment, 90% as informal employment and 50% agricultural employment. The big-gest challenge are the outdated labour laws that are still in use.
This leaves many SMEs struggling with problems of culture and scale, withholding their ability to meet the workforce demands. A labour law reform overhaul is required to absorb the 200 million individuals that will enter the workforce in the next two decades. There are several factors that are pulling the SME sector. Some of them are explained here:
Regulatory impediments: This distrust of the private sector is pervasive in India and manifests itself in thousands of vague, contradictory and unnecessary regulations that smother enterprise. Most toxic is our labour law regime that makes employment contracts like marriage without divorce, that is, biased against employers.
Without a radical overhaul of our labour law regime—by recognising fixed term contracts, making labour a state subject, reversing over-regulation and under-supervision—we will not reverse the 90% informality.
Unbridled informal employment: In a cost-to-company world, benefits are not over and above salary, but come out of it. Today, the law requires employers to deduct 48% of salary towards mandatory benefits for wage levels up to Rs 6,500 per month. Since most employees at low wages cannot live on half their salary, they prefer informal employment.
Wide-scale informality has created a productivity drag in the economy with creation of many subscale enterprises with no access to credit or can create career corridors. About 84% of manufacturing employment are with companies with less than 49 employees. The progressive approach taken by Rajasthan, leading the way for reforms, has set up possibilities of simpler and achievable growth for the SMEs.
No govt support
Entrepreneurs have to substitute for the Indian state by generating their own power, providing their own transport, digging for their own water, arranging their own security and manufacturing their own employees. This not only raises the difficulty level for SMEs
but ensures that most companies end up being dwarfs rather than babies.
The average size of an Indian company is three employees and the policy focus for the Ministry of Micro, Small and Medium Enterprises, unfortunately, continues to be small companies rather than new ones.
Clearly, the expectation is to address these issues to create an environment which enables investments and job creation. The SMEs have been noted to identify and utilise flexi staffing into their workforce as an imperative part of their growth.
With adaptability to business growth needs, the sector promises large scale employment to the youth of the country through flexi staffing. The growth of the organised flexi staffing industry is estimated to be at 10% by 2025.
The expectation of the people is to leap where the growth in job creation will support the growth of the economy at large. Job creation tends to cluster and the perennial policy dream of taking jobs to people must give way to the urgent reality of taking people to jobs. The sector which always felt the pressure of not being able to retain talent owing to their lack of ability to pay well, and absence of branding, is thinking on the adoption of this in a novel way.
In an increasingly complex and competitive economic landscape, the need to align people, processes and technology is stronger than ever. To enhance employability, the most important pillar are the labour reforms. This would help enterprises reduce cost and time taken to innovate and offer sophisticated products and services, also differentiate from peers, optimise cost structures and most importantly compete on a global level with other corporate giants.
(The writer is Executive Director, Indian Staffing Federation)