Interventions at MSME level are not the answer for job creation

The jobs problem in India is acute and there isn’t enough we have done to solve it. We have around 12 million new people joining the working age population every year but we create only 4 million jobs per year. To solve this grave issue, the Union Skill Development and Entrepreneurship Minister Dharmendra Pradhan recently started a new centre to guide new entrepreneurs and provide helpline to MSMEs. A novel step but it based on a common assumption that interventions targeted at MSMEs would create new jobs. This assumption has been questioned by a systematic review by Michael Grimm and Anna Luisa Paffhausen that looks at whether the interventions targeted at MSMEs create new jobs.

Grimm and Paffhausen reviewed the existing evidence on the employment impact programmes to evaluate what impact do interventions have when made on the MSME level. The review concluded that the impact was modest. The interventions are able to “successfully affect intermediate outcomes such as management skills (however) only very few interventions enhance job creation.”

The reviewers have looked at employment created as the new jobs coming up in existing MSMEs (privately or publicly owned) and as jobs that arise through the creation of new MSMEs, including self-employment. The authors analysed 53 studies to understand what form of interventions were taken and if employment generation was the primary objective. The review considers that various interventions would have varied responses. For instance, a measure to increase productivity, such as training, would only result in an increase in employment if the interventions are able to increase outputs and reduce cost. A mere increase in efficiency that does not help reduce cost would not convert into more hiring.

The review brings out various insights but some of the most significant ones are:

  • Most interventions at the MSME level are not intended to create jobs. Primarily because, “enterprise performance is typically measured in terms of output, sales, revenues, business expenditures and profits.” The interventions, therefore, focus more on entrepreneurship training and business development.
  • Entrepreneurship training is beneficial for business skills but mostly does not result in business expansion or more jobs. Unless the firms can generate profit and reduce the cost to a point where they can expand, the training does not do much for job creation.
  • Addressing capital constraints is not enough. Most of the firms use the credit or cash provided as working capital used to increase the inventories. It is rare for firms to use it on fixed capital investment like labour. To add to it, the credit is mostly too small to lead to large changes in capital or production technology which could lead to an increase in employment. For potential business starters or subsistence-type enterprises, the credit is substituted for personal needs like healthcare, housing improvement etc.
  • Formalising the firms does not translate into job creation. To begin with, it is difficult to formalise a firm “because the average firm is simply too small and not profitable enough to make use of the potential that formality offers”. Instead one of the studies shows that the firms that do generate more jobs are the ones that create more permanent and large-scale jobs.

One of the things that do work is an intervention that provides a mix of financial assistance and entrepreneurial training. Although the review has looked at a handful of studies for certain conclusions, the learning is in-depth and needs to be taken seriously to avoid falling into the same traps as other countries have.

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