MSME | Labour formalisation crucial for this crucial sector

MSMEs produce upwards of 30 per cent of India’s GDP. Tracking their growth and employment potential is in everyone’s collective interest

In March, parliamentary panel headed by Tiruchi Siva, Rajya Sabha Member of Parliament, asserted that micro-enterprises centric policies ought to be framed and implemented to nurture this (micro) segment for overall strengthening of the MSMEs. About 110 million people in India are employed across 63 million MSMEs.

These enterprises together produce upwards of 30 per cent of India’s GDP. Of these 95 per cent belong to a segment that clocks an annual revenue of less than Rs 5 crore — the micro-segment. Tracking their growth and employment potential is in everyone’s collective interest. It is in this vein that we analyse the data from the five rounds of survey conducted with 1,400 enterprises by the Global Alliance for Mass Entrepreneurship (GAME) and LEAD at Krea University between 2020 to 2022 to study the impact of COVID-19 on the enterprises and labour.

Over one-third of enterprises interviewed reduced their employee strength between 2020 and 2022. About 53 per cent of firms interviewed reported laying off employees at least once during these two years. The difficulty of invisibalisation of labour due to pervasive informality is evident because between round two to round five firms reporting a reduced employee strength were double that of those reporting layoffs.

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This is in conjunction with furlough being a common practice as informal workers lack legal contracts. None of this is surprising. But what is surprising is that downsizing of employee strength was more strongly correlated with depletion in cash reserves than with a decrease in orders. Petty cash management and inadequate working capital together was reported by 25 per cent of employers as the biggest challenge for their business, second only to ‘low customer footfalls’.

It is concerning that the depletion of cash reserves immediately impacted personal savings of the employers. At the peak of working capital crisis, 65 per cent of entrepreneurs reported dipping into their personal savings to cover business expenses.

The pervasive informality of employment is oddly marked by employer-employee stickiness. Eighty-four per cent employers intended to re-hire the same workers, 41 per cent employers continued to pay wages despite no work, and 13 per cent extended personal loans. Data collected in May-June 2020 revealed that over 80 of the micro businesses paid their workers and did not lay them off despite being only partially or fully shut down.

Over the rounds, the rate of layoffs increased as the challenges with cash reserves deepened. These observations compel us to rethink how to better triangulate the parameters of labour formality — existence of either a written contract, paid leaves, and social security with that of employer-employee stickiness and everyday challenges of business. Such an assessment can be crucial in architecting the deepening of the relationship between enterprises and labour to lessen labour market fluctuations, and offer better quality and consistency of employment to small enterprises.

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This segment of enterprises holds unaccounted family labour and personal savings on the one hand, and hired labour and credit on the other. The impact of the enterprise on the family is immediate and intense. It is for this reason that they need to be treated as socio-economic entities, and not just as economic-legal entities. This is also echoed in the report of the parliamentary panel which says that as the problems faced by the micro-enterprises are different from the problems faced by the small and medium enterprises, there ought to be a separate division overlooking micro-enterprises. Understanding the peculiar nature of the problems requires centring the everyday practice and challenge of running a business. Consistent data that is collected with this approach is needed for architecting transformation for the micro-segment.

Deeper convergence between interventions for promoting growth and efficiency of nano and micro enterprises with social protection interventions aimed at individuals and households can be explored. Labour interventions such as employment guarantees are often considered antagonistic to the interest of employers. But in the absence of adequate social protection for migrant labour, and higher cost of living in place of employment as seen in the survey small enterprise owners, labour interventions often function as safety nets for employees. This is inadequate and unviable given the small scale and profitability of their business, hurting labour and the employer equally.

A thriving labour market, protected via a social floor, ensures consistent access to labour is in fact in interest for employers in this segment.

(Kinjal Sampat is senior consultant, Indian Institute of Human Settlements, and Sharon Buteau heads LEAD at KREA University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.