Maxim of the fish: New MSME norms may not be a blessing for small business

Enhancing the investment and turnover limits for MSMEs was overdue, but the smaller units will have serious reservations

The government has made significant changes in the way it defines the micro, small and medium enterprises (MSMEs) operating in the country. The new definition will essentially mean that almost 99 per cent of India’s registered companies and almost 70 per cent of all listed entities in the country would be able to enjoy the many benefits that the government has announced for the MSME sector. 

The sweep of the MSME sector after the revised definition will be huge. The earlier definition had given the MSME units a share of 25 per cent in India’s gross domestic product (GDP). These units had accounted for almost 45 per cent of India’s total exports. The number of workers employed by the sector was also large at about 120 million. After the revised definition, these shares and numbers would increase even further. The enormity of the changes effected through the new definitions cannot be overestimated.

What kind of changes are these? At a conceptual level, the different yardsticks for service units and manufacturing units have been done away with. This is a major change. An even bigger conceptual change is that the yardstick for manufacturing and services units would now be both the turnover and the level of investment in plants and machinery.

Earlier, there was only one criterion of investment in plant and machinery for determining if a unit belonged to the MSME sector. The assumption was that the investment required in a services unit would be lower than that in a manufacturing enterprise. Hence, the definitions for manufacturing and services units were different.

Taking that argument forward, the investment limit for micro units in the manufacturing and services sectors had been set at Rs 25 lakh and Rs 10 lakh respectively. Similarly, the investment limits for small enterprises were set at Rs 5 crore for a manufacturing unit and Rs 2 crore for a services unit. For medium enterprises, the investment limits were fixed at Rs 10 crore for manufacturing units and Rs 5 crore for services units.

The new composite criteria (including both investment and turnover) that Finance Minister Nirmala Sitharaman announced on May 13 increased the investment limit by 300 per cent for micro units, doubled them for small and medium enterprises and introduced an additional criterion of turnover. Thus, the new definitions were: Rs 1 crore of investment and Rs 5 crore of turnover for micro units in both the manufacturing and services sectors; Rs 10 crore of investment and Rs 50 crore of turnover for small units in the manufacturing and services sectors and; Rs 20 crore of investment and Rs 100 crore of turnover for medium units in both manufacturing and services sectors. By June 1, the composite criteria for medium units were further relaxed and the new yardsticks were Rs 50 crore of investment and Rs 250 crore of turnover.

Even after the huge increases, however, the size of India’s MSMEs would be nowhere near the ones that prospered and contributed significantly to economies in developed countries like Germany or South Korea. The turnover limit for micro, small and medium units in Germany or the European Union ranges between Rs 17 crore and Rs 427 crore. In South Korea also, there are different slabs for such units, but all of the investment limits are much higher than the revised Indian definition. These limits range between Rs 300 crore and Rs 1,130 crore.

The lofty dream of Indian MSMEs teaming up with small and medium units of Germany or Korea may still remain unrealised. The gap in size has been reduced, but it still remains quite large. But whatever increase in the investment and turnover limits has been permitted should help Indian MSMEs in exploiting the new opportunities and the benefits that the government is offering them, particularly in the wake of the package announced after the Covid-19 outbreak.

Remember that the government has also created a protective shield for the MSMEs as far as government procurement orders are concerned.  It has now been decided that all government procurement orders below Rs 200 crore would not require the flotation of a global public tender. In other words, the Indian MSMEs can compete for such orders below Rs 200 crore without any competition from foreign companies.

Such curbs will deny the government the benefits of global competition in ensuring improved quality at lower prices. But it would appear that the increase in the investment and turnover limit for medium enterprises to Rs 50 crore and Rs 250 crore, respectively, has not been an unmitigated blessing for the MSME sector in India. The smaller among the medium enterprises will now have to struggle harder to face tougher competition from new and larger companies that would now be classified as medium enterprises under the increased limits. There is, therefore, an urgent need for expediting domestic policy  reforms to make the smaller enterprises, in particular, strong enough to enable them to face competition and enhance their ease of doing business. 

The arrival of a big fish in a pond cannot be good news for the small fish.  In India’s MSME sector, the age-old principle of Mats ya Nyay (big fish eating up small fish) will soon work against the smaller of the medium enterprises. Expect, therefore, some protests from these millions of micro and small units, who may demand more relief after being threatened by the larger units.