Dalit-run MSMEs find it tough to obtain loans

A recently published peer-reviewed book on micro, small and medium enterprises (MSMEs) reveals that even in the height of India’s economic growth, firms owned by Dalits lagged behind those run by others by a whopping 40% in productivity. These small business entities of Dalits also found it much tougher than those of others to avail of loans.

This study by economists Rajesh Raj SN and Subhash Sasidharan, published internationally by Routledge and titled “Small Firm Ownership and Credit Constraints in India”, covered more than a million MSMEs. During the period under research, 2002 to 2008, the Indian economy grew at an average 8% per year. Since then, however, the country’s economic growth has gone into a slide.

“SC/ST-owned firms lagged non-SC/ST-led firms in productivity by a significant 40 per cent, produced 68 per cent less and were on the average 3/4ths the size of non-SC/ST-owned firms,” says the book. Productivity measures the efficiency of production. It also states that firms owned by socially disadvantaged categories (SC and ST in this case) had about an 8-25 per cent lower probability of obtaining formal credit.

The book argues that gender and caste are major obstacles for enterprises belonging to the MSME sector from forging ahead. After all, growth of MSMEs is directly linked to access to credit markets, it notes.

An investigation of data accessed by the two economists showed that only 10 percent of the firms in the MSME sector are owned by SC/ST entrepreneurs. “Our analysis yields evidence on the clustering of firms in smaller size categories and the large productivity differences between small and medium firms, possibly suggesting the limited firm transition occurring within the MSME sector,” the two authors who have written numerous papers on the informal sector state in the book.

The authors also delve into gender discrimination in the credit market for small firms. “We find female entrepreneurs have about a 15–20 per cent lower probability of obtaining formal loans than male entrepreneurs,” the authors write, adding that in the MSME sector, male-owned firms occupy a substantially larger share. “Female-owned firms and SC/ST firms are found to be smaller in size and less productive as compared to their respective counterparts. Only 11 per cent of these firms reported having had access to formal credit,” the book points out.

“Our investigation analysing the impact of financial constraints on firm growth unambiguously shows that financing constraints significantly obstruct firm growth,” the authors state.

Speaking to Open, Rajesh Raj SN says, “We found that the firm that finances its capital from external sources experiences an average growth rate of one percentage point more than a firm that has not obtained any financial support from external sources. Plus, financing constraints are significantly more harmful to younger firms than to older firms. We find firms owned and managed by women grow at a slower rate than male-owned firms.” While Sasidharan is Associate Professor at the Indian Institute of Technology, Madras, Raj SN is Associate Professor at the Department of Economics, Sikkim University.

Their study also found that female-owned firms lagged those owned by male entrepreneurs in productivity by a massive 23 per cent, produce 41 per cent less and are on an average 5/6ths the size of male-owned firms. “Partial explanation for the underperformance of female entrepreneurs could be found in the concentration of female entrepreneurs in industrial sectors with low productivity,” the book says.

Rajesh Raj SN had last year co-written a paper published by the United Nations University on the transition of jobs between India’s informal and formal sectors during the high-growth period between 2004-05 and 2011-12. It had said that upward mobility for unorganised workers was far less than expected, with women and lower castes facing enormous hurdles and getting confined to what the report called “dead-end” work status.

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