The dominance of small enterprises in industry and services sectors in terms of the percentage of the workforce employed and the relative absence of medium and large enterprises as employers impedes the creation of high-productivity and high-wage jobs on a large scale, said Economist and former NITI Aayog Vice Chairman Arvind Panagariya.

Addressing the 18^th C.D. Deshmukh Memorial Lecture last week in Mumbai hosted by the Reserve Bank of India, Panagariya, a Professor at Columbia University said the current employment pattern (with the majority workforce in small enterprises) translates into low productivity for most workers.  

“It is not merely the case that large enterprises exhibit significantly higher worker productivity than small ones, but their significant presence also helps drive productivity up in the latter… Their preponderance forces greater efficiency among smaller enterprises, which must either serve as their ancillaries or compete with them,” he said. 

Panagariya called this phenomenon a ‘small economic units’ challenge which requires greater attention from the policymakers and explicit recognition of this problem would help design the policies in many areas. 

The small-economic-units challenge, said Panagariya, is present in nearly all spheres of life such as the population of India which remains highly dispersed in small habitations, Indian farmers operating tiny agricultural holdings which undermine their efficiency, and more. 

With respect to small enterprises, 72 per cent of the workforce in industry and services was employed in enterprises with nine or fewer workers and only 10 per cent are employed in enterprises with 20 or more workers, as per the Periodic Labor Force Survey 2021-22. This indicated that the proportion of workers in the large enterprises is in the single digits. 

Firm-size distribution of workforce in industry and services

The data, shared by Panagariya in his address, comparing India and China in employment and worker productivity by firm size in the manufacturing sector in 2005 showed that only 16 per cent of the manufacturing workforce in India was employed in medium and large enterprises vis-a-vis 75 per cent in China. 

Next, considering the relative levels of worker productivity across enterprises of different sizes, Panagariya noted that most workers in India were stuck in low-productivity jobs. “Not only was the productivity in small enterprises extremely low relative to that in large enterprises but the bulk of the workforce was stuck in those enterprises.” 

“Only as medium and large enterprises begin to bid for workers on a significantly larger scale will greater efficiency in the small enterprises be achieved,” said Panagariya as he highlighted the need to move a large proportion of manufacturing workers from small to medium and large enterprises to address the issue of little output by too many workers in small enterprises.

Subscribe to Financial Express SME (FE Aspire) newsletter now: Your weekly dose of news, views, and updates from the world of micro, small, and medium enterprises