Puran Dawar, Regional Chairman (North) – Council for Leather Exports (CLE) says the new definition of MSME has left everyone very confused. “It should have been either based on investment or on turnover. Labour oriented sectors with a Rs 20 crore investment in plant and machinery can certainly have a Rs 500 crore turnover, which has now been capped at Rs 100 crore only,” says Dawar.
As this report points out, the revision of the definition of MSMEs in the country has been long and multiple governments have tried it for a number of years. In fact the Narendra Modi government had moved ahead to amend the definition in its very first term in power, but had to scale down due to opposition from the RSS affiliates.
The existing definition was linked to investment in plant and machinery, but the government was pushing for turnover-based classification. However, powerful lobby groups such as Swadeshi Jagran Manch and Laghu Udyog Bharti, have always argued that any change in definition to only a turnover-based would mean traders and assemblers who import from China and put together a product, could benefit at the cost of local manufacturers.
For players across the sector, the new turnover limit laid out by the FM is proving to be a point of bother. “While there are some benefits of the new definitions, some players will lose too, because of the fact that the upper limit on turnover has been kept very less. Investment limit is okay, since the government has doubled that, but the turnover limit is very small,” says Rajiv Chawla of IamSMEofIndia.
Chawla adds that initially, the government had prescribed upper turnover of Rs 75 crore for small and Rs 250 crore for medium enterprises, and one cannot understand why the limit has been bought down now.
“While the new definitions do offer some privileges to MSMEs, in many cases, these cripple their operations too. Say, in case of their [MSMEs] global investment, if it’s more than the prescribed limit, they would no longer be able to enjoy the relaxations meant for them. For many firms, if either their investment increases or turnover increases, they will lose the status of an MSME. The new changes are not as beneficial to the sector as they could have been because the limit on turnover has been kept so less,” says Chawla.
Arvind Sharma, Partner, Shardul Amarchand Mangaldas & Co, however, says that the increase in investment limits will bring many new units within the realm of the MSME sector, and this will lead to more inclusive growth that is relevant to the present situation.
“Since details of investments and turnover are easily available in books of accounts that are required to be statutorily maintained, compliance should not be an issue. Turnover details should be available in the GST system. There are several other legislations that prescribe dual or multiple criteria eligibility criteria and compliance or implementation is not an issue,” says Sharma.
Sharma adds that the turnover threshold will have a counterbalancing effect and companies that do not benefit from the present change in threshold, should make a representation to the Government to seek suitable relief.
Rohit Shah, Co-founder & CEO, Hemp Horizons Pvt Ltd says while the new definitions set forth are definitely confusing, a lot of companies will now have to start re-evaluating their numbers, Profit and Loss (P&L) statement etc. to try and fit in these new regulations.
This will most likely create a hoard of fixations within a lot of organizations to get the said benefits while falling in the right bracket. “Our Government has been long thinking about amending these definitions, but this will still need a lot of clarification, in order to benefit from these schemes. Similar to how GST was rolled out and slowly they started making amendments which led to a lot of transactional issues, accounting issues. We hope this won’t create another set of problems to deal with in these challenging times.”
The challenges may be particularly glaring in some sectors. “Take the case of diamond exporters, for example. Even a small diamond exporter will have a turnover of Rs 500 crore, which implies, then, that all such diamond exporters will fall out of the purview of the definition. There are millions of gems and jewellery manufacturers who are MSME players. They are exporting atleast more than Rs 250 crore because firstly the raw material cost is high and secondly, they also do substantial value addition,” says Ajay Sahai, Director General & CEO of the Federation of Indian Export Organisations (FIEO).
Jayanth Mutha, Director, Himlite Products does not see the move as encouraging in any way. “Does this give any benefit as such remains in question? Perhaps it will only be of real benefit to the medium scale companies since these could have gone out of the slab previously and missed out on the benefits. It will not really lead to any material benefit for micro and small units,” says Mutha.
Scale is important
Falling under the purview of the definition of an MSME is important for scores of firms. A small business qualifies for priority sector lending, exemptions under labour regulations, comes under the purview of the Credit Guarantee Fund Scheme, finds a place in the purchase preference policy, price preference policy, get benefit in tendering, eligible for marketing assistance scheme among other policies.
Source – Economic Survey of India
If the threshold to qualify as an MSME is kept low, firms are incentivized to remain small in order to reap the benefit of the schemes and policies. According to the Economic Survey of 2018-19 policies often create a “perverse” incentive for firms to remain small. “As economies of scale stem primarily from firm size, these firms are unable to enjoy such benefits and therefore remain unproductive,” said the Survey.
In a chapter devoted to MSME, the Survey said job creation in India, suffers from policies that foster dwarfs. “These dwarfs, i.e., firms with less than 100 workers despite being more than ten years old, account for more than half of all organized firms in manufacturing by number, their contribution to employment is only 14 per cent and to productivity is a mere 8 per cent. In contrast, large firms (more than 100 employees) account for three-quarters of such employment and close to 90 per cent of productivity despite accounting for about 15 per cent by number.”
At the heart of this problem is the definition of MSME. If the threshold or the criteria to qualify is set too low in the definition, India runs the risk of firms staying small and not growing. The turnover threshold of Rs 100 crore for a medium firm seems low.
“If we really want to take the economy to the next level, we have to think at the macro level. If the level for the medium enterprises has been kept at only Rs 100 crore, we can’t achieve much. If looked, on the basis of turnover, it should not be less than Rs 250 crore – or should be based on only investment in plant and machinery, irrespective of any turnover criteria,” says Dawar.
(With contributions from Neha Dewan and Shariq Khan)