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Legislation

Definition of MSMEs

Anurag Vaishnav , Saket Surya - June 8, 2020

On June 1, 2020, the Cabinet Committee on Economic Affairs approved a revision in the definition of Micro, Small and Medium Enterprises (MSMEs).[1]  In this blog, we discuss the change in the definition as approved by the Cabinet, and examine some of the common criteria used for classification of MSMEs.

Currently, MSMEs are defined under the Micro, Small and Medium Enterprises Development Act, 2006.[2]  The Act classifies them as micro, small and medium enterprises based on: (i) investment in plant and machinery for enterprises engaged in manufacturing or production of goods, and (ii) investment in equipment for enterprises providing services.  As per the Cabinet approval, the investment limits will be revised upwards and annual turnover of the enterprise will be used as additional criteria for the classification of MSMEs (Table 1). 

Earlier attempts to amend the definition of MSMEs

The central government has sought to revise the definition of MSMEs in the Act on two earlier occasions.  The government introduced the MSME Development (Amendment) Bill, 2015 which proposed to increase the investment limits for manufacturing and services MSMEs.[3]  This Bill was withdrawn in July 2018 and another Bill was introduced.  The MSME Development (Amendment) Bill, 2018 proposed to: (i) use annual turnover as criteria instead of investment for classification of MSMEs, (ii) remove the distinction between manufacturing and services, and (iii) provide the central government with the power to revise the turnover limits, through a notification.[4]  The 2018 Bill lapsed with the dissolution of 16th Lok Sabha. 

Global trends in criteria for the classification of MSMEs

While India will now be using investment and annual turnover as the criteria to classify MSMEs, globally, the number of employees is the most widely used criteria for classifying MSMEs.  The Reserve Bank of India's Expert Committee on MSMEs (2019) cited a study by the International Finance Corporation in 2014 which analysed 267 definitions used by different institutions in 155 countries.[5],[6]  According to the study, countries used a combination of criteria to classify MSMEs.   92% of the definitions used the number of employees as one of the criteria.  Other frequently used criteria were: (i) turnover (49%), and (ii) value of assets (36%).  11% of the analysed definitions used alternative criteria such as: (i) loan size, (ii) years of experience, and (iii) initial investment. 

Evaluation of common criteria used to define MSMEs

Investment: The 2006 Act uses investment in plant, machinery, and equipment to classify MSMEs.  Some of the issues with the investment criteria include:

  • The investment criteria require physical verification and have associated cost overheads.[7]
  • The investment limits may need to be revised from time-to-time due to the impact of inflation.  The Standing Committee on Industry (2018) had observed that limits set under the Act in 2006 have become irrelevant due to the impact of inflation.7

  • Due to their informal and small scale of operations, firms often do not maintain proper books of accounts and hence find it difficult to get classified as MSMEs as per the current definition.5

  • The investment-based classification incentivises promoters to keep the investment size restricted to retain the benefits associated with the micro or small category.7

Turnover: The 2018 Bill sought to replace the investment criteria with annual turnover as the sole criteria for the classification of MSMEs.  The Standing Committee agreed with the proposal under the Bill to use annual turnover as the criteria instead of investment.7  It observed that this could overcome some of the shortcomings of classification based on investment.  While turnover based criteria will also require verification, the Committee noted that the GST Network (GSTN) data can act as a reliable source of information for this purpose.  However, it also observed that:7

  • With turnover as a criterion for classification, corporates may misuse the incentives meant for MSMEs.  For instance, there is a possibility that a multi-national company may produce a large quantity of products worth a high turnover and then market it through various subsidiaries registered as Micro or Small enterprise under GSTN. 

  • The turnover of some enterprises may fluctuate depending on their business, which may result in the change of classification of the enterprise during a year. 

  • The Committee noted that there is a wide gap in turnover limits.  For instance, an enterprise with a turnover of Rs 6 crore and an enterprise with a turnover of Rs 75 crore (as proposed in 2018 Bill) would both be classified as a small enterprise, which seems incongruous. 

The Expert Committee (RBI) also recommended using annual turnover as the criteria for classification instead of investment.5  It observed that turnover based definition would be transparent, progressive, and easier to implement through the GSTN.  It also recommended that the power to change the definition of MSMEs should be delegated to the executive as it will help in responding to changing economic scenarios.

Number of employees: The Standing Committee had highlighted that in a labour-intensive country like India, appropriate focus is required on employment generation and MSME sector is the most suitable platform for this.7  It had recommended that the central government should assess the number of persons employed in the MSME sector and also consider employment as a criterion while classifying MSMEs.  However, the Expert Committee (RBI) stated that while the employment-based definition is an additional feature preferred in some countries, the definition would pose challenges in implementation.5  According to the Ministry of MSME, employment as a criterion has problems due to: (i) factors such as seasonality and informal nature of engagement, (ii) similar to investment criteria, this would also require physical verification and has associated cost overheads.7  

Number of MSMEs

According to the National Sample Survey (2015-16), there were around 6.34 crore MSMEs in the country.  The micro sector with 6.3 crore enterprises accounted for more than 99% of the total estimated number of MSMEs.  The small and medium sectors accounted for only 0.52% and 0.01% of the estimated number of enterprises, respectively.  Another dataset to understand the distribution of MSMEs is Udyog Aadhaar, a unique identity provided by the Unique Identification Authority of India (UIDAI) to MSME enterprises.[8]  Udyog Aadhaar registration is based on self-declaration by enterprises.  Between September 2015 and June 2020, 98.6 lakh enterprises have registered with UIDAI.  According to this dataset, micro, small, and medium enterprises comprise 87.7%, 11.8% and 0.5% of the MSME sector respectively.

Employment in the MSME sector

The MSME sector employed nearly 11.1 crore people in 2015-16.  The sector was the second largest employer after the agriculture sector.  The highest number of employed persons were engaged in trade activity (35%), followed by persons engaged in manufacturing (32%).

Implications of change in the definition of MSMEs

The change in the definition of MSMEs may result in many enterprises which are currently classified as Small enterprises be reclassified as Micro, and those classified as Medium enterprises be reclassified as Small.  Further, there may be many enterprises which are not currently classified as MSMEs, which may fall under the MSME classification as per the new definition.   Such enterprises will also now benefit from the schemes related to MSMEs.  The Ministry of MSME runs various schemes to provide for: (i) flow of credit to MSMEs, (ii) support for technology upgrade and modernisation, (iii) entrepreneurship and skill development, and (iv) cluster-wise measures to promote capacity-building and empowerment of MSME units.  For instance, under the Credit Guarantee Fund Scheme for Micro and Small Enterprises, a credit guarantee cover of up to 75% of the credit is provided to micro and small enterprises.[9]  Thus, the re-classification may require a significant increase in budgetary allocation for the MSME sector. 

Other announcements related to MSMEs in the aftermath of COVID-19 

MSME sector accounted for nearly 33.4% of the total manufacturing output in 2017-18.[10]  During the same year, its share in the country’s total exports was around 49%.  Between 2015 and 2017, the contribution of the sector in GDP has been around 30%.  Due to the national lockdown induced by COVID-19, businesses including MSMEs have been badly hit.  To provide immediate relief to the MSME sector, the government announced several measures in May 2020.[11]  These include: (i) collateral-free loans for MSMEs with up to Rs 25 crore outstanding and up to Rs 100 crore turnover, (ii) Rs 20,000 crore as subordinate debt for stressed MSMEs, and (iii) Rs 50,000 crore of capital infusion into MSMEs.  These measures have also been approved by the Union Cabinet.[12]    

For more details on the announcements made under the Aatma Nirbhar Bharat Abhiyan, see here. 

[1] “Cabinet approves Upward revision of MSME definition and modalities/ road map for implementing remaining two Packages for MSMEs (a)Rs 20000 crore package for Distressed MSMEs and (b) Rs 50,000 crore equity infusion through Fund of Funds”, Press Information Bureau, Cabinet Committee on Economic Affairs, June 1, 2020.

[2] The Micro, Small and Medium Enterprises Development Act, 2006, https://samadhaan.msme.gov.in/WriteReadData/DocumentFile/MSMED2006act.pdf.

[3] The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2015, https://www.prsindia.org/sites/default/files/bill_files/MSME_bill%2C_2015_0.pdf.

[4] The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018, https://www.prsindia.org/sites/default/files/bill_files/The%20Micro%2C%20Small%20and%20Medium%20Enterprises%20Development%20%28Amendment%29%20Bill%2C%202018%20Bill%20Text.pdf.

[5] Report of the Expert Committee on Micro, Small and Medium Enterprises, The Reserve Bank of India, July 2019, https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/MSMES24062019465CF8CB30594AC29A7A010E8A2A034C.PDF.

[6] MSME Country Indicators 2014, International Finance Corporation, December 2014, https://www.smefinanceforum.org/sites/default/files/analysis%20note.pdf.

[7] 294th Report on Micro Small and Medium Enterprises Development (Amendment) Bill 2018, Standing Committee on Industry, Rajya Sabha, December 2018, https://rajyasabha.nic.in/rsnew/Committee_site/Committee_File/ReportFile/17/111/294_2019_3_15.pdf.

[8] Enterprises with Udyog Aadhaar Number, National Portal for Registration of Micro, Small & Medium Enterprises, Ministry of Micro, Small and Medium Enterprises, https://udyogaadhaar.gov.in/UA/Reports/StateBasedReport_R3.aspx.

[9] Credit Guarantee Fund Scheme for Micro and Small Enterprises, Ministry of Micro, Small and Medium Enterprises, http://www.dcmsme.gov.in/schemes/sccrguarn.htm.

[10] Annual Report 2018-19, Ministry of Micro, Small and Medium Enterprises, https://msme.gov.in/sites/default/files/Annualrprt.pdf.

[11] "Finance Minister announce measures for relief and credit support related to businesses, especially MSMEs to support Indian Economy’s fight against COVID-19", Press Information Bureau, Ministry of Finance, May 13, 2020.

[12] "Cabinet approves additional funding of up to Rupees three lakh crore through introduction of Emergency Credit Line Guarantee Scheme (ECLGS)", Press Information Bureau, Ministry of Finance, May 20, 2020.

Policy

Central government’s response to the COVID-19 pandemic (May 11 – May 22, 2020)

Aditya Kumar - May 22, 2020

As of May 22, 2020, there are 1,18,447 confirmed cases of COVID-19 in India, which is 76% higher than the cases on May 11, 2020 (67,152). Out of total confirmed cases, there are 66,330 active cases, 48,354 patients have been cured/discharged and 3,583 have died (Figure 1). As the spread of COVID-19 has increased across India, the central government has continued to announce several policy decisions to contain the spread, and support citizens and businesses who are being affected by the pandemic.  In this blog post, we summarise some of the key measures taken by the central government in this regard between May 11 and May 22, 2020.

Figure 1: Number of day wise COVID 19 cases as on May 22, 2020

 image

Aatma Nirbhar Bharat Abhiyaan

On May 12, the Prime Minister, Mr. Narendra Modi, announced a special economic package of Rs 20 lakh crore (equivalent to 10% of India’s GDP) aimed towards making the country ready for the tough competition in the global supply chain and empowering the poor, labourers, migrants who have been adversely affected by COVID-19.   Following this announcement, the Finance Minister, Ms. Nirmala Sitharaman, in five press conferences, announced the detailed measures under the economic package.  The economic package includes earlier measures taken by the government to support the citizens and businesses of India.  A break-up of the package is presented in Table 1.

Table 1: Break-up of stimulus from Aatma Nirbhar Bharat Abhiyaan package

Item

Key Topics covered

Amount (in Rs crore)

Stimulus from earlier measures

 Pradhan Mantri Garib Kalyan Yojana, Tax Concessions, and the Prime Minister's announcement for health sector

1,92,800

Part 1

Business including Micro, Small and Medium Enterprises (MSMEs)

5,94,550

Part 2

Poor people including migrants and farmers.

3,10,000

Part 3

Agriculture and allied sectors.

1,50,000

Part 4 and Part 5

Part 4: Coal and mineral sectors, defence sector, civil Aviation, airports and aircraft Maintenance, Repair and Overhaul (MRO), power sector, social infrastructures, space, atomic energy.

Part 5: Government reforms and other provisions including public health and education, additional allocation to MGNREGS

48,100

Sub Total

 

1,295,400

RBI Measures (Actual)

Reduction in Cash Reserve Ratio (CRR), Special Liquidity Facility (SLF) for mutual funds, Special refinance facilities for NABARD, SIDBI and NHB at policy repo rate

8,01,603

Grand Total

 

20,97,053

Note: Part 1, 2, 3, 4, 5 in the table above represents the five press conferences conducted by the Finance Minister to announce the details of the economic package.

Source:   Presentation made by Union Finance & Corporate Affairs Minister Smt. Nirmala Sitharaman under Aatmanirbhar Bharat Abhiyaan to support Indian economy in fight against COVID-19, Ministry of Finance, May 13, 2020, PRS.

For more information on the details of the announcements made under Aatma Nirbhar Bharat Abhiyaan, please see here.

Finance

Following the Prime Minister’s and Finance Minister’s announcements, further announcements were also made. 

  • Cabinet approved the additional funding of Rs three lakh crore to eligible MSMEs and interested MUDRA borrowers under the Emergency Credit Line Guarantee Scheme.  The funding will be covered under 100% guarantee coverage by the National Credit Guarantee Trustee Company Limited in the form of a Guaranteed Emergency Credit Line facility.
     
  • Cabinet also approved the special liquidity scheme for Non-Banking Finance Companies (NBFCs)/Housing Finance Companies (HFCs).  The details of the scheme were shared by the Finance Minister in May 2020 under the Aatma Nirbhar Bharat Abhiyaan.
     
  • Securities and Exchange Board of India (SEBI) revised the post-default curing period for credit rating agencies (CRAs) in their circular dated May 21, 2020.  Now, once the default is cured and payments are regularised, CRAs will upgrade the rating from default to non-investment grade after a period of 90 days based on the satisfactory performance by the company during the period.  As of now, after the entity corrects the default, the CRAs upgrade the rating from default to speculative grade in 90 days and from default to investment grade in 365 days.
     
  • On May 22, the Monetary Policy Committee of Reserve Bank of India (RBI), reduced the policy repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4% from 4.4%.  The marginal standing facility (MSF) and the bank rate have been reduced to 4.25% from 4.65%.  The reverse repo rate has been also reduced from 3.75% to 3.35%.
     
  • The Reserve bank of India (RBI) issued a statement with various development and regulatory policies.  The policies specify details on measures (i) to improve the functioning of market; (ii) to support exports and imports; (iii) to ease financial stress; (iv) for debt management.  The cash reserve ratio (CRR) of all banks will be reduced by 100 basis points to 3%, which will provide a liquidity support of Rs 1,37,000 crore across the banking system. The policy extends the moratorium on payment of instalments of all type of loans as on March 1, 2020 by another three months (up to August 2020).   This is applicable to loans from all commercial banks including Non-Banking Finance Companies (NBFCs) and co-operative banks.   

Lockdown 4.0

The Ministry of Home Affairs (MHA) passed an order extending the lockdown till May 31, 2020. This lockdown will have more relaxations compared to earlier lockdowns.

Zoning of areas

The new guidelines have authorised states/union territories (UTs) to define the red, green and orange zones based on the parameters prescribed by the Health Ministry.  The states/UTs can define a district, or a municipal corporation/ municipality or even smaller administrative units such as sub-divisions, etc. as a red or green or orange zone.

  • Red and Orange Zones: Within red and orange zones, the local authorities will identify containment and buffer zones based on the guidelines from the Health Ministry.  Buffer zones are areas adjacent to containment zones which have a high probability of cases.
     
  • Containment Zones: Movement of individuals will not be allowed in containment zones to ensure strict perimeter control except for medical emergencies and supply of essential goods and services.

The prohibition of certain activities or restrictions in various zones within a state will be at the discretion of the state/union territory as deemed necessary.

Prohibited Activities

Some activities will continue to remain prohibited throughout the country.  These include:

  • all international air travel of passengers, except for domestic medical services, domestic air ambulance and for security purposes or purposes as permitted by MHA;
     
  • metro rail services;
     
  • running of schools, colleges, educational and training/coaching institutions;
     
  • hotels, restaurants and other hospitality services, except for the running of canteens in bus depots, railway stations and airports;
     
  • places of large public gatherings such as cinemas, shopping malls, and gymnasiums entertainment parks;
     
  • social, political, cultural, and similar gatherings and other large congregations; and access to religious places/places of worship for the public. 

Online/ distance learning is encouraged and permitted; and, restaurants will be allowed to operate kitchens for home delivery of food items.

National Directives for COVID Management

The Ministry of Home Affairs issued the National Directives for COVID Management, which apply to public places and work places. As per these guidelines:

  • wearing of face covers is compulsory; 
     
  • spitting will be punishable with fine as may be prescribed in accordance with its laws, rules or regulations by the State/ UT local authority; 
     
  • social distancing is to be followed by all persons in public places and in transport;  
     
  • marriage related gathering has been limited to 50 guests;  
     
  • for funerals/ last rites, the maximum number of persons allowed is 20;  
     
  • consumption of liquor, paan, gutkha and tobacco etc., is not allowed in public places.  

Guidelines for workplaces include:

  • employers will encourage practice of work from home to the extent possible; 
     
  • staggering of work hours will be adopted in respect of all offices and other establishments.  
     
  • there will be provision for thermal scanning, hand wash and sanitizers at all entry and exit points and common areas;
     
  • all work places and other sensitive locations are to be sanitized regularly.  
     
  • social distancing will have to be ensured through adequate distance between workers, adequate gaps between shifts, staggering the lunch break of staff and so on.

Aarogya Setu

The District authorities will ensure installation of the Aarogya Setu application on compatible mobile phones of all individuals and will have to regularly update their health status on the app.

Aarogya Setu Data access and knowledge sharing protocol, 2020

The Ministry of Electronics and Information Technology, Government of India issued a notification on the data access and knowledge sharing protocol, 2020 in reference to the Aarogya Setu mobile application.  The protocol will: (i) ensure secure collection of data by the mobile application, (ii) protect the personal data of individuals, and (iii) ensure efficient use and sharing of personal or non-personal data of the application users.  The protocol provides principles for: (i) collection and processing of response data, (ii) sharing of response data, (iii) obligations of entities with whom the data will be shared, and (iv) sharing of data for research purpose.  A sunset clause is applicable to the protocol subjecting it to a review after 6 months unless there is any extension of sunset clause in wake of the pandemic.

Travel and Movement

  • The Ministry of Railways announced to run Shramik special trains from all districts connected by railways in the country.  The ministry is awaiting details on migrants from each district to operationalise the trains.
     
  • The Ministry of Home Affairs (MHA) has written to Chief Secretaries of all states allowing them to arrange special buses to carry people from railway stations to their home.  This provision is applicable, with condition of maintaining proper social distancing norms, only at places where public or personal transport is not available.
     
  • On May 11, 2020, MHA passed an order permitting movement of individuals by trains.   Following the order, 15 pair of trains are being run   connecting New Delhi to Dibrugarh, Agartala, Howrah, Patna, Bilaspur, Ranchi, Bhubaneswar, Secunderabad, Bengaluru, Chennai, Thiruvananthapuram, Madgaon, Mumbai Central, Ahmedabad and Jammu Tawi.
     
  • The Ministry of Railways in consultation with the MHA and the Ministry of Health & Family Welfare, issued guidelines on partial restoration of train services (other than the Shramik trains) from June 1, 2020.  200 passenger trains with AC, Non-AC and general classes will be operationalised.   Booking for these trains commenced on May 21, 2020.  The guidelines contain detailed information on (i) booking of tickets and charting, (ii) quota permitted, (iii) catering, and (iv) linen and blankets.  All passengers will have to download and use the Aarogya Setu mobile application.
     
  • On May 19, 2020, MHA issued a Standard operating Procedure (SOP) for movement of stranded workers by trains.   As per the SOP, the Ministry of Railways will permit the movement of stranded workers by trains in consultation with MHA.  The Ministry of Railways will finalise the schedules for trains including the stoppages and destinations and will communicated it to state/UTs.  On arrival at the destination, the travelling passengers will have to adhere to the health protocols as prescribed by the destination state/UT.  The inter-state movement of stranded persons by bus and vehicles will be allowed subject to mutual consent of the concerned States/UTs.  The intra-state movement of vehicles will be at the discretion of the states/UTs.
     
  • The MHA amended the order on Lockdown 4.0 to facilitate domestic air travel for stranded persons.  Following the amendment, the Ministry of Civil Aviation issued the order for commencement of domestic air travel of passengers from May 25, 2020.  The passengers will have to show a self-declaration, using the Aarogya Setu mobile application, that they are free of COVID-19 symptoms and those with Red status will not be allowed to travel.  The order contains three annexures with (i) general instructions for commencement of domestic air travel, (ii) the detailed guidelines to be followed by air passengers, and (iii) specific operating guidelines for major stakeholders.

Health

  • The Ministry of Health and Family Welfare issued: (i) updated containment plan on COVID-19, and (ii) updated containment plan for large outbreaks of COVID 19.   These plans provide information on various scenarios of COVID-19 and strategies to control the spread of the disease including definitions, action plans and specific details on (i) identification of containment zones and buffer zones; (ii) perimeter control; (iii) support from various stakeholders such as testing laboratories and hospitals; (iv) pharamaceutical and non-pharmaceutical interventions; and (v) risk communication.

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.

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