Covid effect: MSME definition to be widened further, here’s what Centre planning

By: and |
May 26, 2020 6:00 AM

Days after announcing a new set of criteria to define micro, small and medium enterprises (MSMEs) on which various official benefits will be extended, the government is considering a proposal to widen the definition again — a crucial move that will potentially benefit several thousands of firms.

MSME and transport minister Nitin Gadkari told FE his ministry is floating a proposal to raise the annual turnover limit for a medium enterprise to Rs 250 crore from Rs 100 crore.MSME and transport minister Nitin Gadkari told FE his ministry is floating a proposal to raise the annual turnover limit for a medium enterprise to Rs 250 crore from Rs 100 crore.

Days after announcing a new set of criteria to define micro, small and medium enterprises (MSMEs) on which various official benefits will be extended, the government is considering a proposal to widen the definition again — a crucial move that will potentially benefit several thousands of firms.

MSME and transport minister Nitin Gadkari told FE his ministry is floating a proposal to raise the annual turnover limit for a medium enterprise to Rs 250 crore from Rs 100 crore. Similarly, the investment limit to qualify as a medium enterprise could be raised to Rs 50 crore from Rs 20 crore announced earlier this month. This proposal is subject to clearance by the finance ministry, he added. The Rs 250-crore turnover limit may also exclude export realisation of an entitiy.

“The move is aimed at giving benefits to many such businesses. It is going to transform the MSME sector. It will also enable them to make more investments,” Gadkari told FE in an interview.

There were about 6.34 crore MSMEs in India, of which 6.3 crore are micro units, while 3.31 lakh were small businesses and 5,000 medium enterprises, according to the NSS survey during 2015-16.

The MSME status brings businesses certain assorted benefits — including the mandatory 25% official procurement and loans under the priority sector lending scheme — apart from periodic government and regulatory relief. For instance, subject to the conditions, they will be eligible for the recent package, including additional, collateral-free working capital loan (up to 20%) with a cap of Rs 3 lakh crore (with official guarantee), subordinate debt of Rs 20,000 crore and Rs 50,000-crore fund of funds to bolster the equity base of MSMEs that have growth potential and need some handholding. Just the collateral-free loan move is expected to help 45 lakh units, the government has said.

Also, promoters of MSMEs who are not willful defaulters can bid for their stressed assets under the insolvency law, while those of large companies can’t. There will also be a special insolvency framework for MSMEs.

Central public-sector enterprises procured products worth as much as Rs 33,264 crore from 42,458 small and medium businesses in FY19. This was 30% of their procurement in FY19, according to the MSME ministry data.
Announcing the details of the Rs 21-lakh-crore relief package, finance minister Nirmala Sitharaman had announced that the definition of MSMEs would be tweaked on the basis of both investment and turnover, and not just investment, as had been the practice.

According to the definition announced by her, a micro unit is one where the investment does not exceed Rs 1 crore and annual turnover limit Rs 5 crore, while a small enterprise is one where the investment is between Rs 5 crore and Rs 10 crore and a turnover limit of Rs 50 crore. A medium enterprise is one that has an investment of between Rs 10 crore and Rs 20 crore and a turnover limit of Rs 100 crore. Even this definition marked a substantial jump in the investments limit from the earlier definition.

Elevated investment limits will enable the MSMEs to scale up without bothering about the loss of assorted government benefits if they grew in size, in sync with the idea mooted in the Economic Survey for FY19 that had argued against incentivising “dwarfs”. The Centre also proposed to end any distinction between manufacturing and services MSMEs.

According to the earlier definition, a micro unit is one where the investment does not exceed Rs 25 lakh, while a small enterprise is one where the investment is between Rs 25 lakh and Rs 5 crore and a medium one has an investment of between Rs 5 crore and Rs 10 crore. In case of services, a micro enterprise must invest up to Rs 10 lakh in equipment. A small enterprise will have to invest between Rs 10 lakh and Rs 2 crore, while those investing from Rs 2 crore to Rs 5 crore will qualify as medium services enterprise.

In its FY19 annual report, the MSME ministry said these businesses had created 11.10 crore jobs in FY16. They also made up for 29% of GDP.

Highlighting policy anomaly that helps create “dwarfs”, the Economic Survey for FY19 had suggested that the government set a sunset clause of less than 10 years for all size-based incentives.

While dwarfs (firms with less than 100 workers despite being more than 10 years’ old) make up for over a half of all organised firms in manufacturing by number, their contribution to employment is just 14% and to productivity a mere 8%. In contrast, large firms, with over 100 employees, account for three-quarters of such employment and close to 90% of productivity despite accounting for about 15% by number.

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