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 government on Wednesday decided to tweak the definition of micro, small and medium enterprises (MSMEs) on the basis of both investment and turnover, and raise the investment limits by five times, as it announced various benefits that will be based on the new criteria.
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.
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Until now, the MSME definition was based on just their investments in plants and machinery. However, according to the new definition, 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. The annual turnover limit for a medium enterprise has been drastically cut from Rs 250 crore, which was proposed in the MSME Amendment Bill, 2018, purportedly to ensure that large traders don’t make it to the MSME category.
The latest move came after the government’s attempt to change the MSME definition through the MSME Amendment Bill, 2018, basing it only on turnover and junking the investment-led criterion, was resisted by small manufacturers, who feared traders would then corner official benefits that were earlier meant for them. The government will now have to bring in a revised Bill to amend the MSME Act 2006 for this purpose.
The MSME status brings businesses certain assorted benefits—including mandatory 25% official procurement and loans under the priority sector lending scheme—apart from periodic government and regulatory relief. Promoters of MSMEs who are not wilful defaulters can bid for their stressed assets under the insolvency law, while those of large companies can’t. Given that the Covid-19 crisis will continue to weigh on the economy for a long period, an appropriate definition of MSMEs will be key to assured benefits to them.
According to the extant 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. “Job creation in India, however, suffers from policies that foster dwarfs i.e. small firms that never grow, instead of infant firms that have the potential to grow and become giants rapidly,” it said.
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 is 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.
“The perception of small firms being significant job creators pervades because job destruction by small firms is ignored in this calculus. In contrast, large firms create permanent jobs in larger numbers. Also, young firms create more jobs at an increasing rate than older firms,” the Survey said.