Forum: On Employment Generation

Job Creation in the MSME Sector


Jeemol Unni, Ahmedabad University

One encouraging outcome of the recent controversy on estimates of employment is that it has shifted the focus from a single-minded emphasis on growth of GDP to job creation. The discouraging outcome is that it has called into question the estimates of employment and estimation procedures of the most reputed institution, the National Sample Survey Office (NSSO). P C Maholonobis, the architect of modern statistical institutions in India, appointed as Honorary Statistical Adviser in 1949, Government of India, set up the Central Statistical Unit, which was later named as the Central Statistical Organisation (CSO) in 1951 (Mohan 2007). The NSSO was established in 1950 to collect information through sample surveys on a variety of social and economic aspects. The NSSO continued its remarkable work under able economists and demographers like Pravin Visaria, B S Minhas, Suresh Tendulkar and many more. The Indian Statistical Service has produced excellent statisticians trained in the tradition of the Indian Statistical Institute. They are appointed to the CSO, NSSO, and the earlier Planning Commission, and do excellent work on survey design, training, and checking for the robustness of the data generated by these agencies. I would therefore trust the NSSO’s Periodic Labour Force Survey (PLFS) when it reports that there was a sharp increase in the current weekly unemployment rate which stood at 8.9% in 2017-18.

The PLFS is supposed to replace the NSSO Quinquennial Employment Unemployment Survey (EUS), which has been providing robust estimates of employment since 1972-73. The PLFS is intended to be an annual survey and additionally would provide quarterly estimates of employment in urban areas. This is a vast improvement on the EUS that provided estimates only once in five years. Employment is a fast changing phenomenon and regular updates are required to see how the economy is reacting to macroeconomic conditions and implementation of various policies. To now call the PLFS estimates into question does tremendous disservice to the NSSO, its officers and to the country which requires regular robust data on employment.

Recent Views on Job Creation

In the context of rising open unemployment a number of economists and journalists have recently spoken and written about how to create jobs in the current conditions of recession in the economy. In this note I highlight a few of them and suggest some from my own experience of research on employment, working with NGOs, government statistics, and policy agencies.

C Rangarajan, former governor of the Reserve Bank of India touched on the question of employment in a recent session on “Economic Issues and Concerns for 2019” According to him there are two reasons for economic growth, the first is when new investment occurs and the second is when there is better utilisation of investment. When growth occurs due to better utilisation of investment, the rise in employment is lower compared to new investment with which job creation is much higher. In the current condition of recession in the economy, new investment is limited. A large amount of investment was already made during the high-growth period between 2004 and 2008 and some of this investment is showing up as non-performing assets (NPA) in commercial banks. For job creation to occur, investment rates have to be increased and that is a difficult proposition. The issue is what incentives or market reforms are required for new investments to occur, preferably in labour-intensive sectors, to resolve the unemployment problem?

Azim Premji University recently published the second report, State of Working India 2019’ (SWI) with recommendations for job creation. The report argues for an Urban Job Guarantee Scheme on the lines of the MGNREGA, rural employment programme, listing out the kinds of jobs that can be made available. Provision of Universal Basic Services is seen as a double edged tool (Basole and Jayadev 2019). While the need for good health and education facilities for everyone is a clear requirement, the report suggests that it will also provide jobs in the two sectors. Reviving the manufacturing sector is a key component of the plan to create jobs in the SWI report. It is argued that government needs to get back to declaring an industrial policy, as earlier governments did, to boost the manufacturing sector. There is a suggestion for incubating start-ups aimed at the “bottom of the pyramid” and a plea for skill training on the job as good solutions to the problem.

Industrial policy for regional development was a strategy which was given up with economic reforms. The states now compete with each other for investments. Further, it is possible that the shift from production based indirect taxes to a consumption based tax with implementation of the goods and services tax (GST) may reduce the incentive for investment in states that are intensive in manufacturing industry. This shift is likely to set in once the central government stops providing compensation for the loss in collection of indirect taxes . While the analysis in the chapter in the SWI, ‘How to revive Indian Manufacturing’ is interesting, no clear suggestion emerges on how to proceed and what exactly to include in the industrial policy for regional development.

Thiruvadanthai (2019) critiques the suggestion of the SWI on the urban guarantee scheme and universal services as being welfare measures, which cannot be a substitute for robust employment generation. He argues that India needs jobs and not doles. Such programmes are an implicit acknowledgement that the state cannot foster an economy that can create sufficient jobs for its people.

Jha (2019) recommends a two pronged strategy for job creation. The government should remove obstacles to private sector job creation and lend a helping hand to enable them to sell their products worldwide, which will free them from the constraints of low domestic demand. An alternative suggestion is the public private partnership (PPP) model with local non-profit organisations wherein the latter will create jobs fully funded by the government for 18 months. After 18 months, the workers will be placed in the private sector with the government providing a 50 % wage subsidy for another 18 months. This can achieve the twin objectives of skilling workers and making them employable in private sector jobs in construction, education and health, improve the local infrastructure such as schools, parks and community health centres. This latter suggestion was partly envisaged by the National Skills Development Corporation (NSDC) (Gupta, 2012) without the wage subsidy component. The schemes however did not succeed largely on account of not being able to place the trainees in private sector jobs (Makker, 2017).

Policies with a focus on MSME

According to the Economic Census 2013, of 58.5 million non-agricultural enterprises in the country nearly 66 % were micro and small enterprises (MSME). The small scale of operation in these enterprises is a cause of concern as it inhibits growth. However, these small enterprises can address the current concern of boosting job creation. The government has a vital role in supporting the development of small and medium enterprise (SME) as one of the pillars of economic growth and job creation. Government failure in supporting and creating a favourable business climate has caused business stagnation for SMEs in developing countries (Shohibul, 2019). Following this line of argument I suggest below a series of possible policies that need to be considered for job creation in the MSME sector of the economy.

The features that distinguish MSME from large establishments are their small scale of operation, low investments and low productivity resulting in low earnings. These features ensure that MSME are not able to adapt quickly enough to the changes in trade, technology and tastes that accompany globalization. India has always had a small formal sector, and self-employment has been the norm for centuries. Therefore, for economic growth to be inclusive the policy for the MSME sector has to be two-fold: policies to move the MSME into better and more productive sectors and policies to help the MSME to improve the productivity and income streams in their existing economic activities. These require policies to facilitate increased earnings in the existing economic activities and to reduce risks in this sector.

Skill and Technology

A policy of skill training can be useful for moving the younger and more adaptable workers to new productive activities and to upgrade the existing skills to improve productivity in the existing enterprise. Increasing productivity of MSME through skill training is very closely linked to the use of technology. The challenge of skills and technology is how to facilitate the inflow and diffusion of technology to the large proportion of small enterprises.

The traditional skill-training model in the country has been through the Industrial Training Institutes (ITI) and other training institutes. Skill training is important and we propose an incentivised demand-driven policy approach to skill training. We argue that if students and workers see the benefits of education and training they would be willing to invest in it themselves. Further, if most enterprises see the benefits of training their employees, there will be no poaching across enterprises. Poaching is one of the reasons why MSMEs are not willing to invest in training their workers. The enterprises will be able to reap the benefits of their investment and would be willing to undertake on-the-job training activities. Such a demand-driven incentive structure can replace the supply-driven approach to training and help to reduce the skill mismatch and improve employability of workers in MSME. Of course, all this is based on the premise that there will be high economic growth, which will create a rising demand for workers. Some suggestions for implementing this approach are:

  • In a country aspiring to encourage a start-up culture training in entrepreneurship and mentoring is a major need.. Besides training in entrepreneurship skills, a policy to visualize how entrepreneurs can contact mentors and gain from mentoring could be part of fostering an eco-system that encourages entrepreneurship. A vibrant private eco-system in terms of local chambers of commerce or associations would encourage mentoring.
  • Creating an incentive system for skill training in technical education institutions that are able to find jobs and . Further, incentivise educational . Gender, social and economic diversity will benefit the enterprises, institutions and the country and drive up participation rates of women.
  • Create incentives for firms to invest in their workers’ training. On-the-job training is a major method engaged by formal and informal enterprises to train their employees. Rejuvenating the apprentice scheme of the government, which was meant for thepublic sector, in a privatised form will greatly help and encourage the small enterprise to provide on-the-job training for its workers.
  • A public-private partnership model (PPP) using the existing government and private training infrastructure . The training loan should include the cost of the course plus the cost of commuting to the center if the commute is long.
  • The state could, along with the private sector, support technological innovations for the growth-oriented sectors within the large proportion of MSME.

Role of Clusters and Networking

Subcontracting relationships between the large and MSME sectors generally develop in the dynamic and growing industries, which help the small enterprises gain through access to new markets, technology and an increase in productivity. These clusters of small firms and informal enterprises have the potential of becoming ”skill concentration networks” and fostering innovations. This involves horizontal sub-contracting and networking of firms. Due to the presence of a large number of specialists in such a cluster there is scope for upgrading the technology in the firms. Development of skill concentration network clusters can benefit and help both small and large units to grow together, improving productivity for all.

Large and medium enterprises in the regions periodically visit these small and informal units to observe the innovative ideas developed in them. Networking across firms that allow for discussion of new methods, technologies and marketing strategies would help the small firms and their partners to stay ahead in the competitive environment.

Micro enterprises tend to cluster based on economic activities such as kite-making, garments, bidi and agarbatti rolling, even in street food vending. Inadequate attention is paid to these clusters as they are generally concentrated in low income housing areas of the city. However, these micro enterprises are major generators of jobs and given support can be expected to grow in scale. If these “micro-clusters” are developed with the same importance given to small-scale industry clusters, they can attract credit, more contracts and increase the scale of activities to improve productivity. Provision of basic infrastructure facilities such as roads, water, sanitation, continuous supply of electricity in the micro-enterprise clusters would help to enhance productivity of the units


A big constraint faced by MSMEs is availability of credit in the market particularly for working capital. One of the reasons is an attack on the concept of priority sector lending, which has been weakened by inclusion of all forms of non-production loans in the category, for example, housing and education loans.

Revising priority sector guidelines to provide a certain percentage of total credit to the MSME sector will reduce dilution of the norms. Further a clearly defined penalty on banks not adhering to the revised priority norms can make the policy more effective. Further, the scheme would also require provision of an adequate safety net to the banks for possible losses incurred and a more user friendly Credit Guarantee Scheme to improve credit to this sector.

Banks are not willing to lend to small and own account enterprises due to perceived risks. The micro-finance institutions are relatively well-developed in India. New initiatives with innovative instruments for new and emerging product lines would further help the MSME sector.

The possible policy initiatives discussed here for the MSME sector have a focus on increasing jobs and improving productivity. A boost to this sector, without offering too many sops, will help to rejuvenate many such enterprises and create much needed jobs. This, of course, requires a government that can think broadly, develop forward looking policies and have the will to implement a difficult programme of action.


Basole, Amit and Arjun Jayadev. 2019. “The Employment Question in India: Politics, Economics, and the Way Forward”. The India Forum, 5 April, 2019.

Gupta, Gautam Sen. 2012. “Welcome New Focus on Skilling Our People: A Beginning Made but Many Challenges Going Forward”. Vikalpa, 37(3): 105-110.

Jha, Priyaranjan. 2019. “PPPs could show the way for employment generation in India”. Economic Times, 26 April, 2019.

Makker, Sahil. 2017. “Why India’s Skill Missions Failed”. Business Standard, 2 September, 2017.

Mohan, Rakesh. 2007. “Statistical system of India - Some reflections”, Inaugural address on the Statistics Day and Annual Conference on Financial Statistics, Reserve Bank of India, Department of Statistical Analysis and Computer Services, Mumbai, 29 June.

Shohibul, M.A. Ana, S.Sarjiyanto and S. Sarwoto 2019. “Are SME’s Product and Local Government Programs (OVOP) Coherent?Journal of Economics and Policy, 12(1):100-126.

Thiruvadanthai, Srinivas. 2019. “India needs jobs, not dole”. Business Standard, April 3, 2019.

Unni, Jeemol and Uma Rani. 2008. “Flexibility of Labour in Globalizing India: The Challenge of Skill and Technology”. New Delhi: Tulika Books.

Commentator name
Jeemol Unni, Ahmedabad University, Ahmedabad