In with the Big, Out with the Small: Removing Small-Scale Reservations in India

An ongoing debate in employment policy is whether promoting small and medium enterprises creates more employment. Do small enterprises generate more employment growth than larger enterprises? We use the elimination of small-scale industry (SSI) promotion in India to address this question. For 60 years, SSI promotion in India focused on reserving certain products for manufacture by small and medium enterprises. We identify the consequences for employment growth, investment, output, productivity, and wages of dismantling India’s SSI reservations. We exploit variation in the timing of de-reservation across products and also measure the long-run impact of national SSI policy changes using variation in pretreatment exposure at the district level. Districts more exposed to de-reservation experienced higher employment and output growth. Growth was driven by entrants into de-reserved products and by incumbents previously constrained by size restrictions. The results suggest that promoting small and medium enterprises through India’s SSI policies did not encourage overall employment growth.