An increase in the number of registered firms and the prevalence of numerous small enterprises ones don’t necessarily mean that the country's economic progress is on right track. Discuss (200 Words)
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IAS Parliament 4 years
KEY POINTS
· There are firms that have registered with government agencies. On the second track are informal enterprises that exist in the shadow of the formal economy. Making these two meet is one of the most important policy challenges over the next decade.
· A 10% increase in the registration of new firms in a district increases the gross domestic district product by 1.8%.
· New firm creation is also negatively correlated with unemployment rates in states, which means that those with more startups tend to have less joblessness. This is more so in agriculture and manufacturing, rather than in services.
· The fact that new firms are more likely to be established in the services sector rather than in manufacturing, agriculture and infrastructure may also help explain why job creation has been weak despite economic growth.
· It is well known that most Indian enterprises are not registered firms. They operate in the informal economy.
· Most people starting micro enterprises do it out of necessity, rather than inner drive. Many would prefer a job with steady wages.
· These enterprises offer economic opportunity to people who are unable to get good jobs in formal enterprises. That is a positive.
· Informality also means that low-productivity firms survive and perhaps restrict the growth of registered firms, as they enjoy an implicit subsidy by staying outside the country’s tax system. That is the negative.
· Research by the International Monetary Fund shows that there is a negative correlation between productivity growth in an economy and the degree of self-employment in an economy, a proxy for informality.
· A sudden push towards formalization could create unemployment, since a large chunk of Indian enterprises will not survive the costs of registration or paying taxes. There is no point in glorifying the millions of tiny enterprises that restrict productivity growth in the Indian economy.
· The ideal compromise is the gradual formalization of tiny enterprises with a helping hand from the government.
MURALIDHARAN 4 years
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IAS Parliament 4 years
Good attempt. Keep Writing.
Tapasvi 4 years
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IAS Parliament 4 years
Good attempt. Keep Writing.
