“Micro, small and medium-sized businesses are key to creating the 600 million new jobs needed by 2030 to keep pace with the growth of the world’s working- age population”. – Amina J. Mohammad, United Nations Deputy Secretary General.
- Introduction
The Micro, Small and Medium Enterprises (MSME) have emerged as a highly vibrant sector over the last few years. . TheMSMEs are one of the significant and predominant sources of employment and are regarded as the backbone of most of the economies as these sectors help to generate employment at a larger scale and extent. MSMEs have played a crucial role in the developing countries owing to the fact that it has led to the acceleration of their businesses. According to the data provided by the International Council for Small Business (ICSB), formal and informal Micro-, Small and Medium-sized Enterprises make up over 90% of all firms and account on average for 60% – 70% of total employment and 50% of Gross Domestic Product (GDP).[1] The MSME has also significantly contributed to the Indian economy in terms of GDP, Exports and Employment Generations. Furthermore, MSME fosters entrepreneurship and generates large employment opportunities for rural population. MSMEs also absorb the surplus agricultural labour, which help to reduce the plight of disguised unemployment in rural areas. MSMEs are complementary to large industries as ancillary units and also play an important role in the whole eco-system of the secondary and tertiary sector.
- What are Micro, Small and Medium Enterprises?
The definition of MSME differs from country to country. The European Commission’s definition of MSME is established according to the number of employees and the annual turnover or balance sheet:
- Micro-enterprise: Fewer than 10 employees and an annual turnover (the amount of money taken in a particular period) or balance sheet (a statement of a company’s assets and liabilities) below €2 million.
- Small enterprise: Fewer than 50 employees and an annual turnover or balance sheet below €10 million.
- Medium-sized enterprise: Fewer than 250 employees and annual turnover below €50 million or balance sheet below €43 million.[2]
The MSME in India are governed by the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. The Act was established to address the policy issues affecting MSMEs as well as the coverage and investment ceiling of the sector. The Act also seeks to facilitate the development of these enterprises and enhance their competitiveness. The MSME in India are defined on the basis of their investment in plant and machinery (for manufacturing enterprises) and in equipments (for enterprise providing or rendering services). In the wake of COVID – 19 and the financial stress on the economy, the government has revised the existing investment limits of the MSME. The present ceilings on investment for enterprises to be classified as micro, small and medium enterprises are as follows:
Existing Classification of MSME
Criteria: Investment in Plant & Machinery or Equipment
| Classification | Micro | Small | Medium |
| Manufacturing. Enterprises | Investment < Rs. 25 Lakh. | Investment < Rs. 5 Crore. | Investment < Rs. 10 Crore. |
| Services | Investment < Rs. 10 Lakh. | Investment < Rs. 2 Crore. | Investment < Rs. 5 Crore. |
Revised Classification of MSME[3]
Composite Criteria: Investment in Plant & Machinery or Equipment
| Classification | Micro | Small | Medium |
| Manufacturing Enterprises and Enterprises rendering Services | Investment < Rs. 1 Crore and
Annual Turnover < Rs. 5 Crore. |
Investment < Rs. 10 Crore and
Annual Turnover < Rs. 50 Crore |
Investment < Rs. 50 Crore and
Annual Turnover < Rs. 250 Crore |
The revised classification shall be applicable from 01st July 2020.
a) Who can be registered as MSME ?
MSME registration can be obtained by any of the following type of business entity:
- Proprietorships,
- Partnership Firms,
- Private Limited Company,
- Public Limited Company,
- Limited Liability Partnership
- Hindu Undivided Family,
- Self Help Groups,
- Society / Cooperative Society,
- Trust,
- Association of person.[4]
The enterprises registered under MSME are eligible for various benefits from the Government of India and Reserve Bank of India (RBI). This includes subsidies, incentives, credit facilities from banks and protection against delayed payments by buyers of goods and services. The main purpose of registration is to maintain statistics and maintain a roll of such units for the purposes of providing incentives and support services.
b) Objectives of the registration are as under:
- To enumerate and maintain a roll of small industries to which the package of incentives and support are targeted.
- To provide a certificate enabling the units to avail statutory benefits mainly in terms of protection.
- To serve the purpose of collection of statistics.
- To create nodal centre at the Central, State and District levels to promote Small Scale Industries (SSI).[5]
c) Benefits of Registration
The registered entity generally gets benefits and incentives from the Central and the State Government. These benefits includes easy finance availability from banks, incentives on stamp duty, preferences in procuring government tenders, protection against delay in payments from buyers and right of interest on delayed payment[6], etc.
d) Compliances required under MSME
Any type of business organization can be registered as MSME. They need to comply with all the requirements essential to start the type of business they wish to establish. However, an entity registered under MSME needs to comply with many other requirements so as to get the benefits from the government. An entrepreneur has to obtain several clearances and permissions upon the nature of the unit and products manufactured. These compliances include Udyog Aadhaar Registration, Product Specific Clearances, Regulatory and Taxation Clearance[7], Environment and Pollution related Clearances, Labour Laws Compliances[8], etc.
- Role of MSME in Indian Economy
Micro, Small and Medium Enterprises has helped in the growth of the economy and it is regarded as the cornerstone of the India economy. The MSMEs in India are playing a crucial role by providing large employment opportunities at comparatively lower capital cost than large industries as well as through industrialization of rural and backward areas, inter alia, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country and is the second largest employment provider after agriculture in India. In the recent years the MSME sector has consistently led to the higher growth rate of the industrial sector of India.. The sector is the keystone of the national economic structure and has imparted resilience to ward off global economic shocks and adversities. With around 63.4 million units spread across the geographical expanse of the country, MSMEs contribute around 6.11 per cent of the GDP and 24.63% (per cent) of the services. They contribute around 40% (per cent) of the overall exports from India. The MSME sector is by far the largest provider of employment following agriculture, employing over 120 million people, with 51.2% (per cent) in rural areas.[9] The share of the sector in total manufacturing output was even higher at 45% (per cent). Taking cognizance of the wider set of benefits that the sector offers to the rest of the economy, the Government has envisioned increasing its contribution to GDP to over 50% (per cent) in next few years as the country aspires for a 5 trillion economy.[10] The share of MSME sector in India’s merchandise exports stood at around 48% (per cent) in 2018-2019.[11] This signifies that Indian MSMEs are becoming globally competitive and their products/services are being accepted overseas. In this background, special attention needs to be given to improve the competitiveness and technology up-gradation endeavours. Various schemes and initiatives of the Government are helping the MSMEs to grow effectively. Under the Prime Minister’s Employment Generation Programme (PMEGP) the estimated employment generated (number of persons) in micro enterprises during the years 2014-2015, 2015-2016, 2016-2017, 2017-2018 and 2018-2019 are 3.58 lakhs, 3.23 lakhs, 4.08 lakhs, 3.87 lakhs and 5.87 lakhs, respectively.[12]
- Challenges in the MSME Sector
Despite the MSME sector has enormously led to the growth of the economy, it continues to face several challenges. The major challenges include physical infrastructural problems; absence of formalization; inertia to technology adoption; capacity building; backward and forward linkages; lack of access to credit and risk capital; and the perennial problem of delayed payments, among others. Few of these are explained as under[13]:
a) Infrastructural problems and Competition
Even though there are various efforts provided towards the upgradation of the infrastructure of the MSME, the sector is inadequately equipped with the necessary support system which consequently hinders the growth for their future prospects. Inadequate availability of basic amenities such as work sheds, tool rooms, product testing laboratories, electricity, rural broadband and innovation hubs are acting as a deterrent to the growth of the sector. Despite various schemes by the Government to promote competitiveness of MSMEs, this sector is yet to attain a considerable height at gaining competitiveness due to lack of updated technology and digital platform, inadequate research and development, insufficient investment in human resource and other allied reasons.
b) Access to Credit and Formalization
Credit facility also plays an important role in the development of MSME sector. Credit disbursal to this sector has, however, remained sluggish in recent periods. At an aggregate level, the total credit outstanding from banks and NBFCs to the MSME sector was approximately Rs. 16.6 Lakh Crore as at end of September, 2019. Scheduled commercial banks account for 90% (per cent) of the share of total credit outstanding.[14] Due to their informal nature, MSMEs lack access to formal credit as banks face challenges in credit risk assessment owing to lack of financial information, historical cash flow data, etc. Further, very few MSMEs are able to attract equity support and venture capital financing. Delay in payments has also been one of the major issues.
c) Technological interventions for improving underwriting standards and delivery
The implementation of Goods and Services Tax (GST) has changed the taxation regime nationwide. However, MSMEs are not identifiable as the data on investments in plant and machinery is not captured under GST. Income tax data base contains information relating to financials of the units. It is also necessary to understand that the Udyog Aadhaar portal contains the details of registrations related to the information of MSME, however, there is no single interface available for the lenders to access the data and they have to primarily rely upon manual information furnished by borrowers.
d) Enabling market linkage and tie-up with public procurement platforms
MSMEs face the twin challenge of limited access to quality raw material and market for finished product. National Small Industries Corporation (NSIC) through market assistance scheme facilitates MSMEs to discover markets for their products and the Government e-Marketplace (GeM) portal has enabled MSMEs to connect with buyers from Public Sector Undertakings (PSUs) and Government Departments. However, the number of MSMEs availing benefits under the schemes are few.
- Impact of COVID – 19 on MSME
Many businesses including MSMEs have been adversely hit due to the national lockdown imposed by the government to tackle the COVID – 19 pandemic which has disrupted the supply chain consequently leading to huge losses in the economy. Hence, to improve the current economic situation the Government of India has introduced various plan of action and relief schemes. The Finance Ministry of India, under the mega Rs. 20 Lakh Crore stimulus package aimed to bring the lockdown hit India’s vast MSME sector back to normal. The package focuses to provide benefits to various sectors including cottage industry, MSMEs, labourers, middle class and industries. Out of the 15 measures announced in the package, more than 7 measures directly relate to the MSMEs. In pursuance of the same, the definition of MSME has also been revised by the government. The government has also announced guarantee free and collateral free loans amounting to Rs. 3 Lakh Crores and moratorium of 12 months on payment of the principal amount. One of the most important initiatives that has been undertaken by the Government to promote domestic manufacturing in MSMEs is disallowing global tendering of less than Rs.200 Crores. The government has also provided an extension in the compliance date of various income-tax related deadlines. [15] .
- Conclusion
The MSME sector hold huge potential and there is a need to have right policies and framework which can help and support the MSME to expand their business and deal with their shortcomings in an effective manner. The Government and RBI are continuously implementing various measures to improve the performance of the MSME sector. Recently, the government has launched the technology platform called as Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength (CHAMPIONS) for making the smaller units big by solving their grievances, encouraging, supporting, helping and handholding. There is also a need to improve the competitiveness among the MSME which will help them to enhance their growth. Currently the economy is struggling to get back to normal and under such circumstances it is also important to know how the MSME would tackle with the adversities and avail the benefits provided by the government through various measures.
[1] https://www.un.org/en/events/smallbusinessday/index.shtml last visited June 09, 2020.
[2] https://ec.europa.eu/growth/smes/business-friendly-environment/sme-definition_en last visited on June 19, 2020.
[3] https://msme.gov.in/sites/default/files/MSME_gazette_of_india.pdf last visited on June 24, 2020
[4] https://www.icsi.edu/media/webmodules/Handbook_for_MSME_Entrepreneurs.pdf last visited on June 25, 2020.
[5] https://gjepc.org/admin/msmecircular/49793696_MSME%20benefitsimp.pdf last visited on June 25, 2020.
[6] Ibid.
[7] http://www.dcmsme.gov.in/howtosetup/clearances.htm last visited on June 25, 2020.
[8] https://www.icsi.edu/media/webmodules/Handbook_for_MSME_Entrepreneurs.pdf last visited on June 25, 2020.
[9] https://www.ciiblog.in/economy/msme-growth-driver-of-the-indian-economy/ last visited on June 19, 2020.
[10] https://m.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1095 last visited on June 19, 2020.
[11] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1579757 last visited on June 19, 2020.
[12] Ibid.
[13] Reserve Bank of India, “Report of the Expert Committee on Micro, Small and Medium Enterprises, 2” (June, 2019)
[14] https://m.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1095 last visited on June 19, 2020.
[15] https://msme.gov.in/sites/default/files/MSMEPackageFinalFinal.pdf last visited on June 19, 2020.