A striking aspect of Indian SMEs in the manufacturing sector is that they lag far behind their Asian peers in every way except in their relative size. So while micro and small enterprises in India, defined as those employing 1-49 workers, account for 84% of total manufacturing employment, the figure is 69.6% in the Philippines, 64.7% in Indonesia, 46.5% in Korea, 45.7% in Thailand, 38.9% in Taiwan, 27.5% in Malaysia and just 24.8% in China.
The micro and small industries? dominance of the manufacturing sector, though mostly in employment, is a key debilitating factor, as it erodes all the potential economies of scale and raise manufacturing costs, which render most products less competitive. In contrast, in China, the manufacturing sector has sizable economies of scale as most employment is in large units having 200 or more workers.
An Asian Development Bank study shows large industries accounted for 51.8% of manufacturing jobs in China, but in India the ratio comes to a fifth, at 10.5%. Even in the Philippines, where the share of small-scale sector jobs was closer to India?s, large enterprises had more than double the share of jobs in India, at 22.8%.
The drawbacks of the skewed job ratio are made worse by the predominance of micro enterprises, which employ less than five workers. Most recent surveys show 61% of Indian manufacturing jobs is in the micro enterprises compared with 2-8% in China. Among other Asian nations, only Indonesia has a relatively high micro enterprise job ratio of 44%.
The rationale of the micro enterprises has been a point of debate. While one view pictures them as capitalists in waiting constrained by resource limitations, the other view supported by the ILO is that most micro entrepreneurs would gladly switch to stable wage employment, given a choice, and that the extensive appearance of micro enterprises point to the state?s inability to create productive employment.
While the large share of the Indian micro enterprises may indicate the lack of decent alternate job opportunities, its implications are much more substantial. The preponderance of small units in the Indian manufacturing sector impairs the productivity of the sector and pulls down earnings of both workers and enterprises. This pushes down the units into a low-equilibrium trap, from which it is difficult for them to break out without active outside intervention.
The lack of adequate employment may offer only a partial explanation for the extensive spread of small scale manufacturing units in India. The evidence on the ground show the surge of small sector jobs can be a pointer to their ability to survive by paying extremely low wages.
An inter-country comparison of Asia shows the annual average wage of $587 (in 2005 dollars) earned by workers in the small-scale sector in India was the second lowest among eight countries, with the Indonesian workers earning the lowest at $557. But what is more significant is that the average wage earned by the small-scale industry employee in India is just about 4% of the earning of the small scale sector employee in Korea, which had the highest wages in the small-scale industry across Asia.
The comparisons with other Asian nations also provide a dismal picture. While the earning of a small-scale industry worker in India was just about 5% of that in Taiwan, it was 14% of that in Malaysia and 51% of that in Thailand. The only solace was that Indian worker in the small scale manufacturing sector earned 105% of that in Indonesia.
But low wage earnings in the cross-country comparison are not the only evidence of their significant contribution to the growth of small scale employment in Indian manufacturing. The more clinching evidence is the disparities in annual earnings of workers in different segments within India. The gap in earnings between the small, medium and large industry workers in India was not only the highest across all Asian nations but also disproportionately larger by all rationale.
The numbers show that the annual average wages in the Indian small scale sector was just $587 compared to $1,361 in the medium size and $2,699 in large industry; this indicates workers in the small scale sector earned only 40% wages of medium size industries and 20% of those in the large industry. Thus, the average annual earnings of the employees in the medium-sized industry were 2.3 times and in the large industry were 4.6% times higher than that of a small-scale industry.
This is in sharp contrast to the Chinese experience. Even while evolving to becoming the manufacturing hub of the world, China has been able to hold down wage differentials across the segments to the minimum. The evidence here show that workers in the small industry in China earned $1,144 which was around 70% of the $1,315 earned by those in the medium industry segment and 60% of the $1,898 earned by those in the large sized units. This would mean that employees in the medium and large industries received just 1.1 times and 1.7 times more wages than that of their small scale sector brethren.
To sum up, earnings of the workers in the Indian small scale industry is staggeringly smaller than their brethren in larger units and a miniscule of what their peers get in other Asian countries. Despite the excessively large size of the small scale industry in manufacturing employment, India has failed to increase the earnings of the small industry workers to even a fifth the levels in other Asian countries like Korea, Taiwan and Malaysia. To compound this, the earnings of the small scale industry workers in India are a fraction of the earnings in the medium and large industries. And it is likely that employment in the small scale sector will remain dominant as long as such sizable wage differentials prevail.