In the recent times India has emerged as an influential country showing strong development and improving its standing on international stage. The economic growth of India is highly dependent on manufacturing and service sector and the backbone of these sectors in India are Micro, Small and Medium Enterprises (MSME). With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India.
The Government of India, realising the importance of contribution by MSMEs in nation’s growth has always strived to provide maximum facilities and benefits to MSMEs and as a result this sector has always maintained a growth rate of over 10%. However, with the outbreak of novel coronavirus (COVID-19) all the assumptions, plans and forecasts which were made for manufacturing and service sector in the beginning of this year, seems to be upside down at present, with this health havoc looming over the entire world and mounting a very serious threat to the global economy.
The India-China border dispute has also posed threat to the continuance of operations of MSME sector. It is a well-known fact that in the global supply chain China plays a pivotal role for India and its MSME sector as well as this sector is largely dependent on China for its raw materials. However, Nitin Gadkari, Union Minister of India, has said in a recent interview that ‘The MSME sector will tide over the huge blow caused by the lockdown, and reduce Chinese import dependence by ramping up domestic manufacturing with the government support.’
The Government has been working on a war-footing to resolve issues like capital crunch and access to affordable financing faced by the MSME sector to mitigate huge socio-economic impact. On May 13, 2020 an economic stimulus financial package was unveiled by the Finance Minister of India and the measures taken by Government are expected to help MSME sector not just in combatting the present crisis but will change the financial as well as operational landscape for MSMEs in post COVID-19 era.
Along with the announcement of reliefs for MSMEs, one of the most important announcement made was about the revision in the criterion and thresholds for classification of entities as MSME. Up until now, entities falling with the MSME sector were classified only on the basis of the investment made. Many representations were made to the Ministry suggestions were made by MSME sectors to consider turnover also as the basis for classification.
Finally, new definition of MSME was announced and now as per the new guidelines an MSME is defined as – “A micro unit is one with investment up to Rs. 1 Crore and turnover less than Rs. 5 Crore; A small unit is one with investment up to Rs. 10 Crores and turnover up to Rs. 50 Crores and a medium unit is one with an investment of up to Rs. 20 Crores and turnover less than Rs. 100 Crores.” Also, the distinction between manufacturing and services sector has been done away with.
The need for an upward revision of these thresholds was long due since many entities apprehended taking in more investment due to fear of missing out on MSME benefits and consequently blocked their path to growth and increasing their revenues. Further, due to inflation, various entities would fall out of the threshold thus losing out on the benefits which were initially available to them.
However, the Ministry has clarified vide its circular dated 26th June, 2020 that a composite criterion for classification shall apply. This means that if an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover. As per this criterion, the problem of inflation and reluctance in making more investment as mentioned above remains unresolved and there is a need to address the practical issued that will still be faced by MSMEs because of the composite criterion.
The change in definition although is a welcome step by the Government. More start-up companies are likely to find themselves within the revised thresholds and can thus register themselves under the MSMED Act to avail these benefits. Also, with the increase in threshold, many enterprises which were earlier not classified as MSME will come under its ambit.
To set an example of ease of doing business, MSME ministry has introduced a new MSME registration process which is extremely simple, seamless and entrepreneur friendly launched on 1st July, 2020 under the name of ‘Udyam Registration’. This new registration process is completely online, paperless and based on self-declaration. The user will only have to provide 12 digit biometric Adhaar number for the registration process and no documents or proofs are required to be uploaded for registration.
As the process for registration as MSME is fairly simple, it is likely that more start-ups in the manufacturing and service sector will follow through with this process. Once such registration in place, all benefits accorded to MSMEs, which include the newly added reliefs under the Atmanirbhar Bharat Abhiyan can be accessed by start-up companies and will help them stay afloat in these uncertain times.
One if the most important reliefs announced for MSME sector is collateral free loans to all MSMEs which will be fully guaranteed by the Centre. Further, there will be principal repayment moratorium for 12 months and the interest rate will be capped and there will be no guarantee fee. The reliefs announced will act as a re-starter package for those MSMEs hit by zero cash flow during the national lockdown. Additionally, banks are likely to be more comfortable giving out loans to MSMEs for their working capital needs, which, even though collateral free for MSMEs, will be guaranteed by the Central Government.
With increasing the scope of MSMEs and additional reliefs announced, the Government has attempted to buffer the hit that the MSME sector is experiencing during the COVID-19 crisis. Also, measures like change in definition and introduction of new registration portal will change the entire outlook of MSMEs in India and since these are permanent changes, the will continue to benefit this sector in the long run beyond COVID-19 situation as well.