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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Bill, 2015 which proposed to increase the investment limits for manufacturing and services MSMEs.[3] This Bill was withdrawn in July 2018 and another Bill was introduced.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:
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.
As of April 26, Rajasthan has 2,083 confirmed cases of COVID-19 (fifth highest in the country), of which 493 have recovered and 33 have died. On March 18, the Rajasthan government had declared a state-wide curfew till March 31, to check the spread of the disease. A nation-wide lockdown has also been in place since March 25 and is currently, extended up to May 3. The state has announced several policy decisions to prevent the spread of the virus and provide relief for those affected by it. This blog summarises the key policy measures taken by the Government of Rajasthan in response to the COVID-19 pandemic.
Early measures for containment
Between late January and early February, Rajasthan Government’s measures were aimed towards identification, screening and testing, and constant monitoring of passenger arrivals from China. Instructions were also issued to district health officials for various prevention, treatment, & control related activities, such as (i) mandatory 28-day home isolation for all travellers from China, (ii) running awareness campaigns, and (iii) ensuring adequate supplies of Personal Protection Equipments (PPEs). Some of the other measures, taken prior to the state-wide lockdown, are summarised below:
Administrative measures
The government announced the formation of Rapid Response Teams (RRTs), at the medical college-level and at district-level on March 3 and 5, respectively.
The District Collector was appointed as the Nodal Officer for all COVID-19 containment activities. Control Rooms were to be opened at all Sub-divisional offices. The concerned officers were also directed to strengthen information dissemination mechanisms and tackle the menace of fake news.
Directives were issued on March 11 to rural health workers/officials to report for duty on Gazetted holidays. Further, government departments were shut down between March 22 and March 31. Only essential departments such as Health Services were allowed to function on a rotation basis at 50% capacity and special / emergency leaves were permitted.
Travel and Movement
Air travellers were to undergo 14-day home isolation and were also required to provide an undertaking for the same. Besides, those violating the mandated isolation/quarantine were liable to be punished under Section. 188 of the Indian Penal Code. Penalties are imposed under this section on persons for the willful violation of orders that have been duly passed by a public servant.
All institutions and establishments, such as (i) educational institutions, theatres, and gyms, (ii) anganwadis, (iii) bars, discos, libraries, restaurants etc, (iv) museums and tourist places, were directed to be shut down till March 31.
The daily Jan Sunwai at the Chief Minister’s residence was cancelled until further notice. Various government offices were directed to shut down and exams of schools and colleges were postponed.
On March 24, the government issued a state-wide ban on the movement of private vehicles till March 31.
Health Measures
Advisories regarding prevention and control measures were issued to: (i) District Collectors, regarding sample collection and transportation, hotels, and preparedness of hospitals, (ii) Police department, to stop using breath analysers, (iii) Private hospitals, regarding preparedness and monitoring activities, and (iv) Temple trusts, to disinfect their premises with chemicals.
The government issued Standard Operating Procedures for conducting mock drills in emergency response handling of COVID-19 cases. Training and capacity building measures were also initiated for (i) Railways, Army personnel etc and (ii) ASHA workers, through video conferencing.
A model micro-plan for containing local transmission of COVID was released. Key features of the plan include: (i) identification and mapping of affected areas, (ii) activities for prevention control, surveillance, and contact tracing, (iii) human resource management, including roles and responsibilities, (iv) various infrastructural and logistical support, such as hospitals, labs etc, and (v) communication and data management.
Resource Management: Private hospitals and medical colleges were instructed to reserve 25 % of beds for COVID-19 patients. They were also instructed to utilise faculty from the departments of Preventive and Social Medicine to conduct health education and awareness activities.
Over 6000 Students of nursing schools were employed in assisting the health department to conduct screening activities being conducted at public places, railways stations, bus stands etc.
Further, the government issued guidelines to ensure the rational use of PPEs.
Welfare Measures
The government announced financial assistance, in the form of encouragement grants, to health professionals engaged in treating COVID-19 patients.
Steps were also taken by the government to ensure speedy disbursal of pensions for February and March.
The government also initiated the replacement of the biometric authentication with an OTP process for distribution of ration via the Public Distribution System (PDS).
During the lockdown
State-wide curfew announced on March 18 has been followed by a nation-wide lockdown between March 25 and May 3. However, certain relaxations have been recommended by the state government from April 21 onwards. Some of the key measures undertaken during the lockdown period are:
Administrative Measures
Advisory groups and task forces were set up on – (i) COVID-19 prevention, (ii) Health and Economy, and (iii) Higher education. These groups will provide advice on the way forward for (i) prevention and containment activities, (ii) post-lockdown strategies and strategies to revive the economy, and (iii) to address the challenges facing the higher education sector respectively.
Services of retiring medical and paramedical professionals retiring between March and August have been extended till September 2020.
Essential Goods and Services
A Drug Supply Control Room was set up at the Rajasthan Pharmacy Council. This is to ensure uninterrupted supply of medicines during the lockdown and will also assist in facilitating home delivery of medicines.
The government permitted Fair Price Shops to sell products such as masalas, sanitisers, and hygiene products, in addition to food grains.
Village service cooperatives were declared as secondary markets to facilitate farmers to sell their produce near their own fields/villages during the lockdown.
A Whatsapp helpline was also set up for complaints regarding hoarding, black marketing, and overpricing.
Travel and Movement
Once lockdown was in place, the government issued instructions to identify, screen, and categorise people from other states who have travelled to Rajasthan. They were to be categorised into: (i) people displaying symptoms to be put in isolation wards, (ii) people over 60 years of age with symptoms and co-morbidities to be put in quarantine centres, and (iii) asymptomatic people to be home quarantined.
On March 28, the government announced the availability of buses to transport people during the lockdown. Further, stranded students in Kota were allowed to return to their respective states.
On April 2, a portal and a helpline were launched to help stranded foreign tourists and NRIs.
On April 11, an e-pass facility was launched for movement of people and vehicles.
Health Measures
To identify COVID-19 patients, district officials were instructed to monitor people with ARI/URI/Pneumonia or other breathing difficulties coming into hospital OPDs. Pharmacists were also instructed to not issue medicines for cold/cough without prescriptions.
A mobile app – Raj COVID Info – was developed by the government for tracking of quarantined people. Quarantined persons are required to send their selfie clicks at regular intervals, failing which a notification would be sent by the app. The app also provides a lot of information on COVID-19, such as the number of cases, and press releases by the government.
Due to the lockdown, people had restricted access to hospitals and treatment. Thus, instructions were issued to utilise Mobile Medical Vans for treatment/screening and also as mobile OPDs.
On April 20, a detailed action plan for prevention and control of COVID-19 was released. The report recommended: (i) preparation of a containment plan, (ii) formation of RRTs, (iii) testing protocols, (iv) setting up of control room and helpline, (v) designated quarantine centres and COVID-19 hospitals, (vi) roles and responsibilities, and (vii) other logistics.
Welfare Measures
The government issued instructions to make medicines available free of cost to senior citizens and other patients with chronic illnesses through the Chief Minister’s Free Medicine Scheme.
Rs 60 crore was allotted to Panchayati Raj Institutions to purchase PPEs and for other prevention activities.
A one-time cash transfer of Rs 1000 to over 15 lakh construction workers was announced. Similar cash transfer of Rs 1000 was announced for poor people who were deprived of livelihood during the lockdown, particularly those people with no social security benefits. Eligible families would be selected through the Aadhaar database. Further, an additional cash transfer of Rs 1500 to needy eligible families from different categories was announced.
The state also announced an aid of Rs 50 lakh to the families of frontline workers who lose their lives due to COVID-19.
To maintain social distancing, the government will conduct a door-to-door distribution of ration to select beneficiaries in rural areas of the state. The government also announced the distribution of free wheat for April, May, and June, under the National Food Security Act, 2013. Ration will also be distributed to stranded migrant families from Pakistan, living in the state.
The government announced free tractor & farming equipment on rent in tie-up with farming equipment manufacturers to assist economically weak small & marginal farmers.
Other Measures
Education: Project SMILE was launched to connect students and teachers online during the lockdown. Study material would be sent through specially formed Whatsapp groups. For each subject, 30-40 minute content videos have been prepared by the Education Department.
Industry: On April 18, new guidelines were issued for industries and enterprises to resume operations from April 20 onwards. Industries located in rural areas or export units / SEZs in municipal areas where accommodation facilities for workers are present, are allowed to function. Factories have been permitted to increase the working hours from 8 hours to 12 hours per day, to reduce the requirement of workers in factories. This exemption has been allowed for the next three months for factories operating at 60% to 65% of manpower capacity.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.
