India?s Union Budget has been presented, the Economic Survey has been published and attention has returned to day-to-day governance and politics as usual. Stories about big business, big sums of money and large-scale corruption are the ones that grab headlines. Ultimately, though, key policies that will shape India?s future may be suffering from neglect. Sustained inclusive growth requires innovation and job creation across a broad cross-section of the economy. This includes labour-intensive manufacturing, but, more generally, an industrial dynamism that extends beyond large incumbent firms, foreign entrants, or the relatively few recent domestic success stories.

A few years ago, prominent economist Anne Krueger labelled India?s problem that of a ?missing middle? in its distribution of firms?a gap between small firms in the unorganised sector, and the large firms that grab headlines in billionaires? lists and mega-mergers and acquisitions. This year?s Economic Survey (Chapter 9) offered a clear statement of understanding of potential. ?The role of MSMEs (micro, small and medium enterprises) in the economic and social development of the country is widely acknowledged. They are nurseries for entrepreneurship, often driven by individual creativity and innovation, and make significant contributions to the country?s GDP, manufacturing output, exports, and employment generation. ?MSMEs are important for achieving the national objective of growth with equity and inclusion.?

The Economic Survey goes on to discuss the 2010 report of the Task Force on micro, small and medium enterprises, which indeed provides extensive discussion of what should be done to support MSMEs, as well as a number of other government initiatives in this area, pertaining to skill development, cluster development, credit availability, and so on. Reading through all these, one is reminded of four persistent weaknesses with respect to policy thinking in India. First and foremost, there is little or no information on how well money is spent, or how effective the various initiatives are. Second, there is not much prioritisation of policies, no sense of what the key bottlenecks are. Third (closely related to the previous point), there is no analytical framework within which to understand the issues and guide policy formulation. Fourth, there is a presumption that direct government spending is the answer, rather than creating enabling environments for private sector action.

Anne Krueger and many others (including myself) have pointed out and analysed India?s poor ranking, and failure to improve, in measures of ease of doing business. Last year?s Economic Survey (Chapter 2) provided a detailed discussion. It noted ?India?s unpardonably large bureaucratic costs? as well as that ?The problem lies ? in our conception of the state, to wit that it has to directly deliver on every front and not be content with an enabling role.? This year?s Survey makes

a brief mention of the problems

of doing business in India, but

one does not find any linkage of outcomes, as measured by the ranking and its components, to the policies that are listed, either in the rest of the Economic

Survey, or in documents such as the MSME Task Force report. This year?s Union Budget makes the briefest nod to MSMEs,

and only in the context of traditional directed credit and interest group subsidies.

The situation is not completely bleak. The MSME Task Force report does contain rich discussions of transactions costs for small businesses, the need for improved insolvency procedures, marketing support, tax reform, and even labour law reform. Much of the needed reform is part of an ongoing overhaul of the legal and institutional framework for doing business in India. Those reforms will help all firms, small, medium and large. Again, what is missing is a clear understanding, based on data, of what keeps India?s ?middle? of the firm distribution ?missing in action.?

In the context of understanding India?s industrial dynamics and drivers of growth, it is also unfortunate that the old ?small and medium? category for enterprises was augmented with

micro-enterprises. In this year?s Economic Survey, much of the discussion shifts from MSMEs

to just micro and small enterprises (MSEs). Just as in the case of the old small scale reservation policies, there is a danger

that MSEs become a protected species, their smallness nurtured and prolonged, rather than

policies being developed that

support the growth of firms that deserve to grow.

The venture capital model is designed precisely to select and support companies that are

candidates for high growth. It is not perfect, but it has fuelled tremendous innovation. The Union Budget did not mention venture capital. The Economic Survey has a passing reference in the chapter on financial intermediation, though nothing in its

discussion of MSMEs, despite several references to venture capital in the MSME Task Force report. India?s missing growth driver is that it is not creating enough new firms that have the potential to grow rapidly and generate large-scale new employment. This issue should not be allowed to recede in policy thinking and policy priorities.

The author is professor of Economics at the University of California, Santa Cruz