The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 defines MSMEs on the basis of nature of economic activity and classifies them into Manufacturing Enterprises and Services Enterprises, with three separate caps of investment for each.
The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 redefines MSMEs on the basis of their annual turnover instead, and raises investment limits for the three types of enterprises.
Government stated reasons for changing definition criteria: to encourage growth in the MSME sector without fear of losing benefits during instances of expansion.
Issues with earlier definition:
The thresholds mentioned in the earlier definition have not been adjusted to inflation.
The investment based definition creates an uneven field for older enterprises vis-a-vis new enterprises as the investment required for the same enterprise on the same scale today will be much higher than in the past.
Benefits of redefinition:
A more transparent and verifiable method of classification.
Less bureaucratic hurdles like CA certification.
Increased investment limits helps MSMEs comply with the mandatory and industrial standards.
Prevents under-representation of investment by MSMEs.
Creation of a level playing field between old and new enterprises.
Concerns about redefinition:
Employment has still not been considered an instrument for classification, as is done at the global level.
Enterprises which have a high turnover (with lower investment) will lose out on the benefits from Public Procurement Policy for MSEs.
The new definitions have put several erstwhile ‘large’ firms within the MSME bracket even while excluding some small firms.
Importance of MSMEs
Creation of employment: employs around 120 million persons, second only to the agricultural sector.
Economic growth: with approximately 45 lakh units throughout the country, it contributes about 6.11% of GDP from manufacturing and 24.63% of the GDP from service activities. It also contributes around 45% of total exports.
Promotes innovation and competition.
Contribution to poverty alleviation and reducing inequality: jobs created often directly benefit the poor and vulnerable, particularly women and youth.
Promotion of sustainable development: wide ranging impact for SDGs 1, 2, 3, 5, 8 and 9.
Financial inclusion: it provides opportunities for people in Tier II and III cities to use banking services.
Regulatory Framework for MSMEs
While there are about 90.19 lakh registered MSMEs, there may be actually more than 6.33 crore MSMEs out of which 6.30 crore or 99.4% are micro-enterprises while 0.52% - 3.31 lakh are medium and 0.007% - 5,000 are medium enterprises.
The primary responsibility of promotion and development of MSMEs is of the state governments. However, the GoI supplements the efforts of the states through various initiatives.
The Ministry of Micro, Small & Medium Enterprises (M/o MSME) and its organizations assist the states in their efforts to encourage entrepreneurship, employment and livelihood opportunities and enhance the competitiveness of MSMEs.
The Office of Development Commissioner (MSMEs) functions as the Nodal Development Agency under the M/o MSME.
Industries (Development and Regulation) Act, 1951
Provides the conceptual and legal framework for MSMEs.
It provides the necessary powers to the Central Government to amend the provisions of this act from time to time so as to encourage small scale and ancillary undertakings.
Micro, Small & Medium Enterprises Development Act, 2006
MSMEs are governed by the Micro, Small & Medium Enterprises Development Act, 2006.
It aims to facilitate the promotion and development of small and medium enterprises.
➤ Setting up of a National Board for MSMEs
➤ Classification of Enterprises
➤ Advisory committees to support MSMEs
➤ Measures for promotion, development and enhancement of MSMEs
➤ Schemes to control delayed payments to MSMEs
➤ Enactment of rules by state governments to implement the MSME Act, 2006 in their respective states.
➤ It provides the first legal framework in the country for recognition of the concept of "enterprise" which comprises both manufacturing and service entities.
➤ It defines medium enterprises for the first time and seeks to integrate the three tiers of these enterprises.
➤ The Act also provides for a statutory consultative mechanism at the national level with balanced representation of all sections of stakeholders, particularly the three classes of enterprises; and with a wide range of advisory functions.
➤ It provides for progressive credit policies and practices, and preference in Government procurements to products and services of the micro and small enterprises.
Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018
The Bill was introduced in July 2018 in the Lok Sabha to legalize the changed definition and classification of MSMEs by the government.
The Standing Committee presented its Report in December 2018.
Current Status: Lapsed.
Other salient features:
➤ The central government may change the new annual turnover limits (discussed in section on defining MSMEs) through a notification. The maximum turnover may be up to three times the limits specified in the Bill.
➤ The Bill extends the classification of micro, tiny or village enterprises as medium enterprises also (as opposed to only as small enterprises in MSMED Act, 2006).
Atmanirbhar Package Regulations for MSMEs
MSMEs were announced to be within the purview of Atmanirbhar Bharat Abhiyan (ANBA) resulting in special regulatory measures for the sector:
Revision of MSME definition (discussed earlier)
Subordinate Debt (SD): Rs 20,000 crore approved as SD to provide equity support to stressed MSMEs.
Loans will be provided via the partial guarantee to banks by the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises).
Collateral Free Loans: Rs. 3 Lakh crore approved as CFL for businesses including MSMEs wherein borrowers with up to Rs. 25 Cr. Outstanding and Rs. 100 Cr. Turnover will be eligible.
The government will act as 100 per cent guarantor to banks and NBFCs on both the principal and the interest.
The scheme has already been launched.
Creation of a ‘Fund of Funds’ with a corpus of Rs 10,000 crore through which the government will buy equity stakes in MSMEs with growth potential and viability.
Online marketplace for the MSME sector.
Disallowing global tenders in procurements up to Rs. 200 crore in order to create more opportunities for domestic players. This is related to giving a fillip to the domestic MSME sector as import substitution approach of ANBA.
Clearing of MSME dues by the government and Public Sector Units within 45 days. Directions in this regard have been issued at the level of Cabinet Secretary, Expenditure Secretary and Secretary, MSME.
Other Government schemes for Promotion of MSMEs
National Manufacturing Competitiveness Programme (NMCP)
Credit Linked Capital Subsidy for Technology Upgradation
Marketing Support/Assistance to MSMEs (Bar Code)
Lean Manufacturing Competitiveness for MSMEs
Design Clinic for Design Expertise to MSMEs
Technology and Quality Upgradation Support to MSMEs
Entrepreneurial and Managerial Development of SMEs through Incubators
Enabling Manufacturing Sector to be Competitive through QMS&QTT
Building Awareness on Intellectual Property Rights (IPR)
Funds, Credit, and Subsidies:
Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE): Ministry of MSME and SIDBI have jointly established the CGTMSE to implement Credit Guarantee Scheme for MSEs. The corpus of CGTMSE is contributed by GoI and SIDBI.
Financial Support to MSMEs in ZED Certification Scheme as part of supporting & promoting the Make in India initiative.
Interest Subsidy Eligibility Certificate (ISEC): The scheme has been introduced to mobilize funds from banking institutions for filling the gap between the actual fund requirements and availability of funds from budgetary sources.
Marketing and Promotion:
Market Promotion & Development Scheme (MPDA): It is an amalgamation of different MSME schemes implemented by the Khadi sector including publicity, marketing, market-promotion and marketing development assistance.
Marketing Assistance Scheme and Procurement and Marketing Support Scheme (P&MS) provide assistance for the activities such as organizing exhibitions, developing domestic markets and facilitate market linkages.
Development of specific industries and generating Employment:
Prime Minister Employment Generation Programme (PMEGP): PMEGP scheme aims to create employment opportunities for the MSMEs in the country. This MSME scheme is being managed by Khadi and Village Industries Commission (KVIC) at the national level.
Revamped Scheme of Fund for Regeneration of Traditional Industries (SFURTI): The main objectives of the SFURTI scheme is to organize traditional industries, provide employment, enhance marketability, equip traditional artisans and further boost the governance cluster systems.
Coir Vikas Yojana (CVY): It includes schemes for technology upgradation, S&T, skill upgradation, market promotion, welfare measures, and a special scheme for women in coir industries.
Innovation, Entrepreneurship, Skill Development and Training:
A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE) aims to create new jobs, promote entrepreneurship, boost economic development, and promote innovation to further strengthen the competitiveness of the MSME sector.
Entrepreneurship Skill Development Programme (ESDP) aims to organize Entrepreneurship Development Programmes on a regular basis to nurture the talent of youth.
Assistance to Training Institutions (ATI): This MSME scheme aims to provide capital grant to the training institutions at the national level which are operating under the Ministry of MSME for entrepreneurship and skill development training/ capacity building programmes.
Challenges Faced by the MSME Sector
Inadequate access to market due to several reasons including:
➛ lack of adequate capital
➛ inadequate use of marketing tools
➛ lack of awareness of larger economic environment
➛ low production capacity
➛ ineffective marketing strategy
Absence of adequate and timely banking finance due to lack of quality credit infrastructure and challenges including long sanction process, high rates and delay in disbursements.
Non-availability of suitable technology: day to day urgencies of these businesses hinder their long term perspectives and adoption of new and advanced technology, which is crucial factor for survival of MSMEs.
Non availability of skilled labor at affordable cost: being thinly staffed makes it very difficult for them to allocate resources to work on long and midterm projects.
Constraints on modernization & expansion due to lack of funds, innovation or expertise.
Over-reliance on existing clients.
MSMEs during Covid-19:
Survey reports have shown that disruptions caused by the Covid-19 pandemic have impacted MSMEs earnings by 20-50%, with micro and small enterprises faced the maximum heat.
While the bank dues have been deferred, the immediate challenge of MSMEs has been to pay their statutory dues, wages and pressing creditors.
A large number of start-ups and MSMEs have reduced their workforce in the last eight months, with 31% of them reducing their women workforce, as the covid-19 pandemic impacted their business and revenue adversely.
The Rs. 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for MSME sector is valid only till October, even though the sanctioned amount so far is only nearly 65% of the target.
Recommendations and Way Forward
Upgrade infrastructure utilities (like water, power supply, road/rail) for any enterprise to run its operations successfully.
Adopt best practices and follow international standards to go forward for offering innovative solutions.
Focus on transfer of information and skill development to effectively use the transferred technology. Improvement in quality of training is also essential.
MSMEs should invest in innovation, research and development and new technologies.
State promotion of and assistance to MSMEs at different and upgraded levels of certification is imperative.
Labor Reform: Labor laws which take into account the changing nature of labor workforce should be implemented to balance the needs of protecting the workforce and enhancing the competitiveness of the MSMEs.
Energy at lower costs: MSMEs should not be charged exorbitant rates for using electricity and natural costs.
Increased liquidity as a result of features like interest rate reduction for MSMEs and assurance of on-time payments from state-owned enterprises should become the norm in order to ensure a flourishing MSME sector.
Entrepreneurship and investing in women entrepreneurs:
According to UN Women, the global economy could see as much as US$ 28 trillion growth by 2025, if women participate equally as men in entrepreneurship.
Unfortunately, women MSME entrepreneurs, particularly those from rural poor communities, are often further disadvantaged in growing their business.