The Micro, Small and Medium Enterprises (MSMEs) create greater profits for their promoters and contribute to job creation and productivity in the economy. Hence, policies must focus on enabling the MSMEs to grow into large sized firms.

However, the government provides a large number of benefits to the MSMEs, irrespective of their age, i.e., even those firms that are more than 10 years old continue to avail these benefits from the government. Since these benefits are available only to the MSMEs, the old MSMEs are reluctant to grow into large sized firms due to the fear of missing out on the government benefits. Thus, the government policies foster dwarfs, i.e., small firms that never grow.

The Economic Survey defines such dwarf firms as firms with less than 100 workers, despite being more than ten years old. Even though such firms account for more than half of all organized firms in manufacturing by number, their contribution to employment is only 14 per cent and to productivity is a mere 8 per cent.