In first columnIn this article, I have written about the development scenarios that will shape India’s path to the ranks of middle-income countries (MICs). In this column, I examine the role a central character in this story—the Indian firm—plays, and the role it should play in India’s transformation.
I use Proves database collected and managed centrally to monitor the Indian economy,To estimate the age and size structure of firms in India. For the period 2016-2021, it includes comprehensive data 12,460 Firms This group includes almost all listed firms and many, but not all, privately owned firms.
There are several caveats to be heeded at the outset. The database does not include the multitude of small businesses – from the corner store to the mom-and-pop business – that make up the majority of India’s informal sector. This includes some of the fastest growing startups—including the more than 100 firms that are unicorns today. For example, Flipkart, Zoho and Zerodha are included in the database but BYJU’S, Udaan and OYO are not. Several state-owned companies have been excluded from the database. And some of the companies in the database are subsidiaries of foreign companies.
I use this database of 12,460 firms to answer two questions. First, what is the distribution of firms in India by size and age? i.e., how many firms are large (over $1 billion in annual revenue), how many are upper mid-sized (annual revenue between $500 million and $1 billion), how many are low to medium-sized (annual revenue of $50 million and $50 million in annual revenue). Between $500 million) and how much smaller (annual revenue less than $50 million)? And how many firms are old (more than 10 years in age) and how many are young (below 10 years in age)?
Second, how has the revenue share and revenue growth rate of each size category changed since 2016? Crucially, what do the revenue shares and growth rates of each size group reveal in relation to key policy questions that will shape economic growth over the next few decades?
Table 1 provides a visual summary of the distribution of firms by size (with rows) and by age (with columns).
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“Missing Beach”
Five conclusions emerge from Table 1. First, 91 percent of India’s firms are old, 78 percent are small, and 71 percent are older and younger. Given that the ProVece database does not include many small firms, an accurate estimate of the share of smaller firms in the firm’s population is likely to be too high.
Second, the 220 large firms represent less than 1.75 percent of all firms in this sample and, as a group, the firms are likely to be a very small part of the actual population. Many old and large firms will be familiar to readers. This group includes Reliance Jio, Patanjali Ayurved, Amazon India, Apple India and many more. Among the 14 young and big firms, Kia Motors, Xiaomi, Vivo Mobile and Suzuki Motor Gujarat are subsidiaries of foreign firms. Some firms, such as Adani Power Mundra and Jindal Stainless, are new firms started by established companies.
Third, evidence of the “missing middle” – the lack of medium-sized firms – can be seen in the table. Note that upper-medium-sized firms make up more or less the same fraction of the sample of larger firms. The phenomenon of “missing middle” is not unique to India. hsih And kleno (2009) emphasize that many small firms in developing countries do not develop to become large firms because they lack managerial knowledge and face financial constraints. Bloom, Mahajan, McKenzie and Roberts (2010) There is current evidence that the quality of management practices – in particular, setting goals, monitoring performance and creating incentives – is the primary reason that many small firms do not scale. Bloom and van Renen (2010) in their study of 620 Indian firms found that a high proportion of Indian firms, like their counterparts in China, Greece and Brazil, performed poorly on several dimensions of management practices.
Fourth, 2,279 low to mid-sized firms account for 18.30 per cent of all firms and contribute significantly to India’s corporate revenue and revenue growth. Familiar names of this conglomerate include Coffee Day Global, Amalgamation, United Breweries, Audi India, Chettinad Cement and more. Less familiar names in this group include Shree Mahavir Pulses, Penta Gold, Vantage Knowledge Academy, Maharani Paints and MK Proteins.
Fifth, smaller firms that make up 78 percent of all firms in this sample probably make up a large proportion of the population of firms. Significantly, 67 percent of all small firms have less than $10 million in revenue and barely grow from year to year. One may wonder why this is so. Hurst & Pugsley (2011) conclude that many small businesses remain small because their owners do not have the aspirations, worldview or abilities to grow. For entrepreneurs who wish to grow their firms but are unable to do so, factors such as lack of managerial knowledge, inadequate access to capital, compliance burden and social capital (lack of connections) are the biggest deterrents.
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Small but steady growth of small firms
Figure 1 shows the share of revenue earned for each size class.
Three conclusions emerge from Figure 1. First, although large firms account for less than two percent of all firms, they have a huge impact on revenue. Large firms are, and will continue to be, the most important players in driving economic growth in India. They have managerial capabilities, ability to hire, train and retain the best talent and mobilize financial resources. Note that revenue for large firms declined with the onset of the pandemic in 2020, but regained lost ground in 2021.
Second, compared to lower mid-sized firms (in blue), upper medium-sized firms (in red) scored significantly below their weight (compare red and blue lines). Upper mid-sized firms account for only 10 percent of revenue, which can be attributed to the “missing middle” – there are not enough upper mid-sized firms to power the growth of their size class. In contrast, small to medium-sized firms accounted for a steady growth of 23 percent+ of total revenue due to the influx of smaller, but stable, smaller firms in their size bracket.
Third, smaller firms, though many, contributed between five and seven per cent of total revenue. While their revenue share is unlikely to grow much, the influx of startups and small businesses could be a force multiplier.
The emphasis on market share (in Figure 1) hides the volatility of revenue. Figure 2 shows the annual revenue growth rate between 2016 and 2021.
Figure 2 provides visual confirmation that the period 2016-2021 was difficult for firms. Note that the revenue cycles of each size class have moved in tandem (as one might expect) although their dimensions differ. After slowing growth in 2017 and declining in 2020, corporate revenue for all four class sizes improved strongly in 2021. The strong performance of the upper mid-sized and lower-medium sized segments promises that many firms in these size classes could move up. Or two size classes over the next decade.
Grassroots Game Changer
Firm is the engine that drives economic growth. Its most visible role is to combine labor, capital and other resources to produce the goods and services that consumers want. Its less visible role is as a change agent, a-la Joseph Schumpeter’s creator and destroyer. The 75 year old economy definitely needs new ideas, technologies, business models and ecosystem to replace the old one.
Compared to Indian firms, public policy should be framed for two purposes. The first is to increase the number of firms of all sizes. Adjusted for GDP, India has fewer large and medium-sized firms than many countries. McKinsey Global Institute (MGI) notes That China has twice as many and South Korea has three times as many Indian firms. The grassroots efforts to make entrepreneurship a national passion can prove to be a game changer.
The second objective of the policy should be to help firms of all sizes improve their productivity. Even the largest and most productive Indian companies fall short of their foreign counterparts. MGI reports that the average Chinese, South Korean, Malaysian and Thai firm is significantly more productive than its Indian counterpart. India should aim to create an environment that makes it easy for businesses to solve their problems effectively and expeditiously.
Ram Shivakumar is a professor of economics and strategy at the Booth School of Business at the University of Chicago. Thoughts are personal.
(Edited by Ratan Priya)