CURRENT AFFAIRS

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Recently, the Cabinet Committee on Economic Affairs has approved a revision in the definition of Micro, Small and Medium Enterprises (MSMEs).

In the following article, we will discuss the significance of MSME sector, change in the definition as approved by the Cabinet, and examine some of the common criteria used for the classification of MSMEs.

Significance of MSME sector

·        According to the National Sample Survey (2015-16), there were around 6.34 crore MSMEs in the country.  The micro sector with 6.3 crore enterprises accounted for more than 99% of the total estimated number of MSMEs.  The small and medium sectors accounted for only 0.52% and 0.01% of the estimated number of enterprises, respectively. 

·         The MSME sector employed nearly 11.1 crore people in 2015-16.  The sector was the second largest employer after the agriculture sector.  The highest number of employed persons were engaged in trade activity (35%), followed by persons engaged in manufacturing (32%).

·       They also employ the maximum number of women workers. They absorb the constant flow of migrant labour coming from the countryside to seek jobs in towns and cities. It encourages inclusive growth.

·        It has emerged as a major supplier of mass consumption goods as well as a producer of electronic and electrical equipment and drugs and pharmaceuticals.

·       MSME sector accounted for nearly 33.4% of the total manufacturing output in 2017-18. During the same year, its share in the country’s total exports was around 49%.  Between 2015 and 2017, the contribution of the sector in GDP has been around 30%. 

Hence to give boost to this sector government has revised the definition of MSMEs.

Current and revised criteria’s for MSMEs

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 to define micro, small and medium enterprises. The Act classifies them based on:

(i) investment in plant and machinery for enterprises engaged in manufacturing or production of goods, and

(ii) investment in equipment for enterprises providing services.

Changes brought in the new definition are:

1.      The distinction between manufacturing and service units for MSMEs had been removed.

2.      Investment and annual turnover will be used as the criteria to classify MSMEs.

Why the changes have been made?

Issue in using “Only Investment” as the criteria

The 2006 Act used investment in plant, machinery, and equipment to classify MSMEs.  Some of the issues with the investment criteria include:

·         The investment criteria require physical verification and have associated cost overheads.

·         The investment limits may need to be revised from time-to-time due to the impact of inflation.  The Standing Committee on Industry (2018) had observed that limits set under the Act in 2006 have become irrelevant due to the impact of inflation.

·         Due to their informal and small scale of operations, firms often do not maintain proper books of accounts and hence find it difficult to get classified as MSMEs as per the current definition.

·         The investment-based classification incentivizes promoters to keep the investment size restricted to retain the benefits associated with the micro or small category. This has been "killing the urge to grow" among the MSMEs

Issue in using “Only Turnover” as the criteria

A Standing Committee noted that:

·         With turnover as a criterion for classification, corporates may misuse the incentives meant for MSMEs.  For instance, there is a possibility that a multi-national company may produce a large quantity of products worth a high turnover and then market it through various subsidiaries registered as Micro or Small enterprise under GSTN. 

·         The turnover of some enterprises may fluctuate depending on their business, which may result in the change of classification of the enterprise during a year. 

·         The Committee noted that there is a wide gap in turnover limits.  For instance, an enterprise with a turnover of Rs 6 crore and an enterprise with a turnover of Rs 75 crore (as proposed in 2018 Bill) would both be classified as a small enterprise, which seems incongruous. 

Issue in using “Employment” as the criteria

According to the Ministry of MSME, employment as a criterion has problems due to:

·         Factors such as seasonality and informal nature of engagement

·         Similar to investment criteria, this would also require physical verification and has associated cost overheads.

Hence in the new definition, Investment and annual turnover will be used as the criteria to classify MSMEs.

Implications of change in definition of MSMEs

·         The change in the definition of MSMEs may result in many enterprises which are currently classified as Small enterprises be reclassified as Micro, and those classified as Medium enterprises be reclassified as Small.  Further, there may be many enterprises which are not currently classified as MSMEs, which may fall under the MSME classification as per the new definition.  

·         Such enterprises will also now benefit from the schemes related to MSMEs. The Ministry of MSME runs various schemes to provide for:

(i)  flow of credit to MSMEs,

(ii)  support for technology upgrade and modernisation,

(iii) entrepreneurship and skill development, and

(iv) cluster-wise measures to promote capacity-building and empowerment of MSME units.  For instance, under the Credit Guarantee Fund Scheme for Micro and Small Enterprises, a credit guarantee cover of up to 75% of the credit is provided to micro and small enterprises.