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Aatmanirbhar Bharat: The revised definition of MSMEs and the confusion

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Aatmanirbhar Bharat Abhiyaan, a special economic rescue package rolled out by the Central Government worth around 20 lakh crores, which is also equivalent to almost 10% of India’s GDP. The initiative is among the largest economic stimulus package announced by nations around the world. The package focusses on land, labor, liquidity, and laws, which will cater to various sections including cottage industry, MSMEs, laborers, middle class, industries, among others. Delivering the first part of the Aatmanirbhar Abhiyan, Finance Minister Nirmala Sitharaman on Wednesday announced that Centre has broadened the definition of Micro Small and Medium Enterprises (MSME), by revising the limit of investment in machinery or equipment and introducing a turnover criterion. 

The reason behind the revision

According to the Finance Minister, the change in definition is supposed to be in favor of MSMEs. The low threshold limit in the old definition of MSMEs averts companies from expanding further, which also stops them from enjoying the benefits that are accorded to them by the law. With the emended definitions of MSMEs, they will not have to worry about growing their size and can still avail benefits. 

The decision was not a spontaneous one, it was a longstanding demand of the sector. The Union Cabinet back in 2018 approved amendments to the law to change the criteria for classifying MSMEs from ‘investment in plant and machinery’ to ‘annual turnover’. This was done to allow a single definition for purposes related to taxation, investment, etc., which would ultimately lead to further improvement in India’s ease of doing business scenarios. However, in the current situation, the same was done to allow more and more MSMEs to avail of the benefits that are extended to them by the government. 

The earlier definition

The Micro, Small and Medium Enterprises Act, 2006 defines MSMEs engaged in manufacturing based on their investment in plant and machinery. According to the preliminary definition, manufacturers with Rs 25 lakh investment in plant and machinery were termed micro-enterprises and those with investments between Rs 25 lakh and Rs 5 crore were defined as small enterprises. Further, firms with investments of up to Rs 10 crore were regarded as medium.

Increased Investment Limit and additional criterion of turnover

The investment limit has been revised upwards and an additional criterion of turnover has been instituted. MSMEs will be termed as “Micro units” if they have investments up to Rs 1 crore and turnover of less than Rs 5 crore. For an MSME to be regarded as a “Small unit”, its investment limit has been increased from Rs 5 crore to Rs 10 crore with a turnover of fewer than 50 crores. And, enterprises with investments up to Rs 20 crore with a turnover of less than Rs 100 crore will be defined as “Medium units”. Furthermore, under this new definition, the distinction between manufacturing and services enterprises has been eliminated.

Increased output orientation and benefits

As the distinction between manufacturing and services has been removed, both manufactures and traders can avail of the benefits. The one basis of classification has made it easier for both government and the industries to recognize a small business as an MSME. With the help of the additional criterion of turnover, the government can match the turnover cited by an organization on the GST database and can easily classify the organization under the revised definition. This will lead to more inclusive growth that is relevant to the present situation. Moreover, the benefits extended under the new definition range from loans under the priority sector lending scheme, a 25 percent share in procurement by government and government-owned companies, promoters being allowed to bid for stressed assets under insolvency law as well as relief from the government and regulators from time to time. 

Creation of additional confusion among the small businesses

Getting covered under the sphere of this new definition is very crucial for the financial health of small businesses in India. Incentives that are available only to small-scale firms such as Credit Guarantee Fund Scheme, Purchase preference Policy, Priority Sector Lending, and Raw Material Assistance scheme are necessary for the survival of a small enterprise in the country. The new turnover based classification could be immensely problematic for these small businesses as the upper limit on turnover has been kept very less. For a lot of these organizations, any increase in their investment or turnover might result in the loss of their MSME status. Consequently, these firms might start reassessing their balance sheets to fall under the bracket of the new definition. 

Now, because the limit on turnover has been kept so fewer firms are encouraged to remain small to cash in on the benefits extended to them by the government. According to the Economic Survey of 2018-19, “as economies of scale stem primarily from firm size, firms are unable to enjoy such benefits and therefore remain unproductive,”. Therefore, with the revised definition in effect, the country will have to carry a risk of small businesses being unproductive and not growing into large-scale firms. The new policy might be the need of the hour for the revival of the coronavirus ridden Indian economy, but at the same time, this can obstruct further growth and development of small-scale businesses in India. 

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