Barriers to Indian firms achieving high growth

A new World Bank report, High-Growth Firms: Fact, Fiction and Policy Options for Emerging Economies, sheds light on many issues affecting growth and productivity of the Indian economy.

High-growth firms (HGF) –

• The Organisation for Economic Co-operation and Development defines high-growth firms (HGFs) as those that employ more than 10 workers, with employment growing at an average annual rate of 20% or more over at least three consecutive years.
• The sixth economic census, released in 2016, showed that 131.29 million people were employed in 58.5 million enterprises. That means the pool of HGFs is small indeed.

Details of the report –

• The report finds that for the emerging economies it examines, HGFs account for 8-22% of the total number of firms; India falls somewhere near the middle with 14.3%.
• The interesting—and troubling—aspect is just how heavily disproportionate HGFs’ contribution to output growth is. Across the economies in question, this can range from 49% to a massive 83%. India fares relatively well, coming in at the lower bound of that bracket.

Challenges to India’s growth story –

The report highlights important challenges.

1. First, while HGFs don’t appear to have much horizontal spillover, they do have vertical spillovers. This means that when small, informal enterprises and large, formal enterprises are able to integrate effectively in supply chains, the barriers that the former face in achieving high productivity growth are lowered. However, there are several barriers here. Given their smaller balance sheets and less scope for accessing credit, micro, small and medium enterprises (MSMEs) depend to a large extent on timely cash payments from the large companies they supply to in order to function effectively. Micro and small enterprises frequently face inordinate delays in receiving payments. And goods and services tax kinks related to input tax credit are further complicating the picture.
2. Second, the report makes two linked observations. HGF is something of a misnomer in that firms rarely exhibit such growth across their lifetimes but, rather, exhibit episodes of such growth. Older, more established firms with resources to burn are not more likely to experience such episodes. It enables crony capitalism and political subsidies, allowing inefficient firms to rise to the top of the pile. And it contributes to the credit squeeze small enterprises face since land is the primary form of collateral used in business loans.
3. Third, unsurprisingly, the report shows that “the relationship between various measures of innovation and the probability of experiencing a high-growth event is generally positive”. According to the Economic Survey 2017-18, India’s R&D spending over the past two decades has been stagnant at around 0.6% to 0.7% of gross domestic product. Moreover, in India, the bulk of the R&D spending is done by the government with private investment lagging by a fair distance.

Conclusion –

The report provides useful guidance for crafting appropriate policy mixes to boost chances of high-growth episodes through exports.

Source – Livemint

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