The redefinition of Micro, Small and Medium Enterprises (MSMEs) may have unintended consequences that can defeat the official objectives. Critically examine the observation.

By Srirangam Sriram, Sriram's IAS, New Delhi.

Economic lockdown was imposed to tackle COVID-19 in March 2020 and the decision has severely hurt jobs and livelihoods, especially in the informal sector. To mitigate the hardships, the Prime Minister proposed Rs. 20 lakh crore Atma Nirbhar Bharat stimuli and relief package. In May, the Finance Minister (FM) announced the measures for the MSME sector. A prominent item in it was the much awaited revision of the criteria for registration as an MSME, which is as follows:

1. Abolition of the distinction between manufacturing and services enterprise.
2. Raising the upper limits for investment in plant and machinery to qualify as an MSME.
3. Introducing “turnover” as an additional criterion.

A revision in MSME definition which is a part of the Atmnirbhar Bharat package says

• Micro manufacturing and services units was increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover.
• The limit of small unit was increased to Rs. 10 Crore of investment and Rs 50 Crore of turnover.
• For medium Enterprises, now it will be Rs. 50 Crore of investment and Rs. 250 Crore of turnover.

There are two reasons for the upward revision of the limits: one, to account for inflation; and, two, to enable firms to secure economies of scale in production and avoid “splitting” enterprises to remain “small”, to continue availing official assistance. Thus, there will be more investment, innovation, professionalisation, higher production and cost of production will also see benefits.

However, some scholars argue that redefinition has only helped the larger corporate firms to get under the fold of registered MSME sector. The redefinition thus seems like the corporatisation of MSMEs. Millions of unincorporated enterprises in the informal sector, which are economically vulnerable, requiring public assistance do not seem to benefit from the redefinition.

Some representatives from the Micro, Small, and Medium Enterprises (MSMEs) have criticised the Centre’s proposed move to redefine the segment based on a company’s turnover instead of investments in plant and machinery as there will no difference between a manufacturer and traders. The benefits for the MSME sector will go to both manufacturing and traders. In such a scenario, manufacturers would not want to take the pain to do business. Those who want to set up their manufacturing units will be discouraged. It would encourage traders to import more and the consequent fall in manufacturing would adversely impact the country’s GDP growth. Employment will take a hit. With the increase in imports, the adverse balance of trade will worsen and de-industrialisation may happen.

MSMEs get a number of benefits in India.
The government has been encouraging and supporting the sector through policies for preferential access to credit, preferential purchase policy and some reservation in manufacturing as well.

Published date : 15 Dec 2020 12:36PM