Deregulation for MSMEs: An important step towards economic growth

The Economic Survey 2024-25, tabled in Parliament last week, had one clear message: faster economic growth in India is possible only if central and state governments make it easier for small and medium enterprises to run their operations. To do that, the Survey has pushed for systematic deregulation in the micro, small and medium enterprises (MSME) sector, which contributes to 30% of the national gross domestic product (GDP).

Every enterprise has to comply with a wide variety of local, state and central government regulations in order to operate, some of them specific to a particular industry. These include laws about labour, safety, site construction, building infrastructure and more. Deregulation refers to the process of reforming or removing regulations that are excessive and unnecessary – ones that hamper productivity, growth, competition and the ease of doing business.

Small enterprises are more easily crushed by the burden of such excessive compliances. To grant them some relief, the Economic Survey has proposed a three-step process to help states deregulate: 1) identifying areas for deregulation, 2) comparing the regulations with other states and countries, and 3) estimating the cost of each of these regulations on individual enterprises.

At the Godrej Foundation, we happen to support a partner organisation that is working towards promoting the acceleration of economic growth by helping make labour-intensive manufacturing exports more competitive: the Foundation for Economic Development (FED). A non-profit action tank with the goal of facilitating sustained growth of 10% in India, FED shares one of Godrej Foundation's core beliefs – that economic growth is the most effective tool for poverty alleviation and improving living standards.

According to FED, exports are a crucial path towards accelerated economic growth. In 2023, India's manufacturing exports had reached $447 billion. More than 45% of this manufacturing output comes from the MSME sector, which FED has described as being "at the centre of job-led growth in India".

One of the most labour-intensive industries within manufacturing is textiles and apparel, whose exports reached $44.4 billion in 2022 – a year-on-year increase of 41% – with a potential to reach $209 billion by 2029. According to the latest data from the union ministry of commerce, the textile and apparel industry makes up 12% of India's exports, and is the second-largest employment generator after agriculture. Unsurprisingly, 80% of this industry comprises MSMEs.

However, India's share of global goods trade is only around 2%. To recognise this gap and realize the opportunity it presents, we will need a spectrum of regulatory reforms. For example, setting up a small automotive manufacturing unit requires nearly 500 compliances, including site inspections, labour audits, and building and water certificates. But according to FED, some unnecessary rules can easily be reformed. We look forward to such action in laws and regulation towards making India competitive in labour intensive manufacturing.