22nd January 2022

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Indian Job Conundrum

All countries see real progress when they create jobs. This happens when small and medium-sized businesses grow and create jobs at the same time. India, over the years, has faced the problem of lack of support. There are not enough medium-sized companies operating in the country.

How are job creation and company size related?

McKinsey Global Institute (MGI), in a recent report titled India’s Tipping Point: An Economic Agenda to Stimulate Growth and Jobs, notes that India has around 600 large companies with revenues of more than $ 500 million dollars per year.

  • The labor productivity of these companies is 11 times higher than that of the economy in general.
  • These companies are also responsible for 40% of exports and employ 20% of the direct formal workforce.
  • But there are not enough companies of this type. India has fewer large companies relative to gross domestic product (GDP) than China, Malaysia, South Korea, and Thailand.

Why does India have fewer large companies?

In 2018, the revenues of large Indian companies accounted for 48% of nominal GDP. The contribution of large companies from other emerging economies such as China, Malaysia and Thailand was 1.5 to 1.6 times that of India. There are not enough large companies in India due to the lack of medium and medium-sized companies. It is the midsize companies that become large companies and create jobs and competition along the way. As MGI points out: “India’s 1,500 midsize companies with a trillion dollars of GDP, with revenues between 40 and 500 million dollars, are only half the number of similar emerging economies compared to their GDP.”

Does the slow growth of the body have something to do with this?

In 2012, the revenues of large companies in India amounted to around 58% of GDP. In 2018, that figure fell to 48% of GDP. This weak business growth resulted in slow economic growth and a situation where only 77 midsize companies went big between 2012 and 2018. By comparison, 93 midsize companies went big between 2008 and 2012.

Why can’t midsize companies grow?

In large part, there are two reasons for this. The first is the high cost of compliance in India. Small and medium-sized companies lack “organizational resources to handle costly procedures … compared to large companies,” as the MGI report notes. It takes 1,445 days to fulfill a contract in India. In South Korea, it takes 290 days. So, Indian companies are not growing. Second, the lack of access to low-cost capital prevents companies from growing. This problem can be solved by deepening the financial markets of India.

What steps should be taken to solve this problem?

India needs to triple the size of its large companies by 2030. This can happen if more than 1,000 medium-sized businesses and 10,000 small businesses can scale, creating millions of jobs. This requires unlocking the land supply and allowing prices to fall by 20-25%, creating flexible labor markets, privatizing the 30 largest USP companies, distributing energy efficiently, improving performance by conducting specific business and sector policies to improve the productivity.

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