Empower MSMEs, Look Beyond Subsidies: How To Solve Capital Conundrum For A Smarter Growth Blueprint For India

By Dr Ananth S

India has recently notified new labour codes with rules to be framed in the next few months. This comes as the country's economic growth sees some seemingly bright spots in an otherwise increasingly complicated global and Indian economic outlook.

On the face of it, the future looks bright, but as one starts peeling the layers, a completely different story emerges. The optimism a few years ago about India taking advantage of the "demographic dividend" seems to be giving way to exasperation. The stagnation in jobs is aggravated by the increased number of youth joining the labour market each year.

The fact that approximately 65 per cent of the Indian economy is driven by internal consumption should ring the alarm bells for policymakers since it indicates that there is a compulsion for the country to run faster just to remain at the same place.

The Issue: Low Private Capital Investment

The challenge the Indian economy has been facing for the past few years is that most large companies that have the ability to invest are not doing so. Instead, we see three predominant trends in private sector investments. First are those companies that constantly demand disproportionate and exceptionally large government subsidies for any investments, or even claim that they will start investments only by riding piggyback on government subsidies. Then there are those companies that hope that foreigners will subsidise the risk-taking so that Indian promoters can benefit by a form of "rent-seeking" to drive their growth.

India's Private Sector: Mistaken Demands & Minimal Investments (ETV Bharat)

The third category of businesses is those that are simply waiting to license or even copy business models and technology available off the shelf. None of these models is sustainable in the long term.

Instead, the ideal form of sustainable growth will be for businesses of all sizes to constantly invest in capital expenditure, more particularly those aspects that give them long-term benefits, including intellectual property.

In a large official survey of private capex trends and future outlook conducted by the National Statistical Office (NSO), only about 71% enterprises responded, thereby seeming to indicate that either they were being cautious, or their plans were too fluid, or they did not want to disclose them.

Among those who disclosed, 40.3% of enterprises plan to undertake CAPEX on core assets during 2024–25. Interestingly, the survey indicates that most sectors intend to reduce capex in 2025-26 compared to the previous year. The silver lining is that manufacturing seems to be more optimistic than others. Additionally, 28.4% intend to invest in value addition to existing assets. Only 5.8% proposed to invest in intangible assets, including intellectual property.

Interestingly, approximately 43% of the respondents indicated that they did not plan any capital expenditure. This approach is precisely the incorrect method for companies to adopt when developing sustainable business models. No wonder India's manufacturing fell from about 19% in 1994-95 to the present 12% with most businesses preferring to import goods from China, while R&D has stagnated at about 0.8% of GDP for more than three decades.

Indian labourers working in a factory (Getty Images)

Wrong Solutions

Basic economic logic indicates that productivity which in turn impacts profitability of the private sector can only grow by two methods: (a) by large scale investments in plant, machinery, technology (research and development or R&D) and/or using these three in combination with up-skilling/re-skilling of the workforce thereby producing more on a per hour basis at lower cost; and (b) by wringing out more work per employee which is usually achieved by making workers work for more number of hours with minimal increase in pay thereby on an average producing more per worker.

Hence, the sooner companies realise that delivering services based on borrowed models, those based on government patronage or even government support that creates artificial barriers, will not only reduce profitability in the long term but will make these businesses redundant.

It is no wonder that many older businesses that were into low-end services, especially in low-end software exports, called on the government to extend working hours to a maximum of 12 hours from the present 8 hours. The government has simply (and wrongly) wilted under pressure from these business leaders of the previous generation, who are out of touch with reality by not even understanding the present-day labour market dynamics and practical aspects.

In most cities where such businesses and factories are concentrated, going to work requires 2 to 4 hours of travel and back. Hence, a 12-hour work shift will mean between 14 hours to 16 hours with no time left for family life or even to rest. In the long term, such overwork will lead to health issues and faster burnout. Moreover, any work that requires the application of the mind cannot simply be done under such stressful arrangements.

File photo of an Indian labourer (Getty Images)

In many industries, work shifts beyond 8 hours a day are already a reality and one which is often ignored by the Labour Department. Hence, importantly, the government has overlooked the fact that in most private businesses, especially those in the service sector, a larger percentage of employees tend to carry their work home.

This has become more pronounced after COVID, which created a "work from home" concept. Ironically, none of the business leaders who have called for longer working hours are in niche or cutting-edge sectors. Instead, they are mostly in businesses that either produce low-end goods or low-end services, which are dependent on people working long hours at low or moderate wages. Most of these are in sectors that are easily dispensable by the use of Artificial Intelligence (AI) and robotics. Hence, the urge to extract as much as possible from human labour at the lowest rates seems to be the only model presently in vogue.

Way Out

In the era of rapid technological advances, including robotics and AI, profitability is not going to be easy since the shelf life of technology is becoming shorter. Hence, what is needed for businesses is to look beyond models where they can use government subsidies to acquire assets like land and attempt to benefit from demographics and urbanisation without actually investing in plant, machinery and technology.

The investments by Chinese companies after the 2008 financial crisis are impressive: with government support over the past 10 to 15 years, they have invested in robotics, AI and R&D by building scale that cannot be matched elsewhere. Their "Dark factories" are now sociological and economic legends. These factories churn out huge quantities of product on a totally automated scale around the clock, with human labour mostly deployed in further research and development, sales and after-sales services, logistics, etc.

For optimum utilisation of resources, the government must change the manner it gives subsidies. Instead of free land and cheap electricity, it is best that governments link subsidies to investments in select parameters based on the specific sectors. These could be value addition, export competitiveness, innovation, R&D, as well as intellectual property, or similar areas.

There is simply no point in throwing good public money on models that will not survive the future global competitive marketplace for political or election funding purposes. The most important aspect is to internalise capex beyond the large companies because in most countries, including large economies, about 50-60% is contributed by small and medium enterprises (which we call the MSME sector).

In the case of India, approximately 80% of the manufacturing units are run by family businesses. Hence, supporting those large numbers instead of a few chosen ones will probably be better for the larger economy and the consumer. It is important to note that no useful purpose will be served if labour compliances are reduced while increasing compliance requirements, including forms to be filled in other areas like taxes.

It may be useful for the government to consider new forms of support in the changing scenario, like creating a special extension service which hires unemployed graduates, trains them in compliance requirements, pays them and sends them to help out the MSMEs with their compliance requirements and related needs for a limited period of time, say 3 to 4 years.

This will enable them to meet the formal sector needs without any investments in time and money. In that period, the MSME itself could concentrate on core activities, while those providing these services will find employment and gain valuable experience. Servicing these millions of MSMEs or family-owned businesses could be a valuable source of employment to educated youth who now may be wasting their time on social media.

It is important to note that support need not always be more loans/credit. Instead, providing some essential services for a limited period till the units stabilise could be a better form of support.

(Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat.)