\n\u2022 Government Budgeting.<\/b><\/span><\/p>\n
CONTEXT<\/strong><\/span><\/p>\n The Covid-19 relief package for micro, small and medium enterprises and the changes to the defining criteria for MSMEs are examined. While the changes in the MSME definition open the sector to larger enterprises, the composite criteria introduce fresh ambiguities to the defining of MSMEs. Liquidity infusion measures at this juncture without adequate measures to revive demand will not help MSMEs tide over the Covid-19 lockdown-induced crisis.<\/em><\/strong><\/p>\n ANALYSIS<\/strong><\/span><\/p>\n The micro, small and medium enterprises (MSMEs) are of immense importance to the Indian economy, in terms of generating employment, output, and exports.<\/p>\n Yet, it is a sector that is vulnerable, and can quickly \u00adbecome unstable and unviable, particularly in the presence of external shocks. In recognition of these aspects, the \u00adfinance minister announced the much-awaited relief package for the\u00a0MSMEs\u00a0on 13 May 2020 to tide over the\u00a0Covid-19 lockdown-induced crisis.<\/p>\n The announcements also included a change in the defining criterion for\u00a0MSMEs. I discuss what the change means for the sector. The gaps in the response of the state to ensure viability of the\u00a0MSME\u00a0sector in the midst of the ongoing pandemic are explored and some specific recommendations are offered.<\/p>\n Defining MSMEs<\/strong><\/span><\/p>\n Any priority sector scheme that seeks to target beneficiaries, includes certain entities and excludes others. Thus, defining these entities becomes important. Being classified as\u00a0MSMEs\u00a0provides ent\u00aderprises some handholding by the state, making them eligible for certain benefits.<\/strong> These include priority lending from banks, collateral free loans, mandatory sourcing of 25% of procurements by the central government from micro and small enterprises (MSEs), and a slew of other targeted benefits.<\/p>\n Identifying what qualifies as a small and medium enterprise (SME) has been a contentious issue for decades. Internationally, consensus on a uniform norm has been hard to achieve (Berisha and Pula 2015), and the most accepted ones are from the World Bank and the International Finance Corporation based on the criteria of employment, assets, and turnover, where a unit has to fulfil the employment criteria, and any one of the two financial criteria to qualify as an\u00a0SME.<\/p>\n In India,\u00a0MSMEs\u00a0were defined by the\u00a0MSME\u00a0Development Act of 2006<\/strong><\/span><\/span> for the first time. The act used investment in plant and equipment for manufacturing and in equipment for services (excluding investments in land and building, costs of research and development and pollution control \u00addevices, etc) as the defining criteria.<\/p>\n The recent changes in the definition of \u00adMSMEs\u00a0follow a composite criterion, \u00adusing both turnover and investment in plant and machinery. They also eliminate the difference in investment thresholds between the manufacturing and services sector.<\/p>\n While threshold revisions to adjust for inflation itself are a routine task, there has been deliberation in the past with the\u00a0MSME\u00a0Development (Amendment) Bill 2018 introduced in the Lok Sabha to \u00addefine\u00a0MSMEs\u00a0by the turnover criteria alone.<\/p>\n With the Goods and Services Tax (GST) Act in place, a measure of turnover was seen as an easier and a more transparent way to define\u00a0MSMEs.\u00a0This was, however, met with stiff resistance on the grounds that the turnover thresholds were too high, and defining the\u00a0MSMEs\u00a0by turnover alone would expand the group to include much larger units (Sinha 2018).<\/strong><\/span><\/p>\n Investment size and turnover criterion:<\/strong><\/span>\u00a0Defining\u00a0MSMEs\u00a0by the investment criteria has one major weakness: the \u201coriginal\u201d investment in plant and machinery or equipment criteria does not offer a level playing field to newer entrants in the market.<\/strong><\/p>\n An older plant would show substantially depreciated investments in its book of accounts. This unit would qualify as a much smaller unit, while any new entrant that needs similar \u00admachines would have to make much higher investments.<\/p>\n Thus, what would be a micro unit because of historical book value of investments, would be classified as a much larger unit if set up many years later. In this sense, the \u00adannual turnover-based criteria to define the sector might be much more meaningful. Also, calculating reinstated costs of machinery is a cumbersome and costly process, and entails physical verification, often requiring the assistance of a chartered accountant, and hence, additional transaction costs. Turnover can be far more transparent, particularly now that a large number of\u00a0MSMEs\u00a0are under the ambit of the\u00a0GST.<\/p>\n The turnover criterion was criticised as it might provide an incentive to \u00adunder-report and qualify as an\u00a0MSME. Though, under-reporting investment size is also a possible route for a unit to \u00adremain classified as an\u00a0MSME. So, a solution to under-reporting per se cannot be addressed through changes in the criteria for defining the\u00a0MSMEs. Instead, that would require monitoring and inspection.<\/strong><\/span><\/p>\n The new composite criterion has come in with lower turnover thresholds than what the 2018 amendment bill had proposed. However, it does not undo the problems that stem out of using the original size of investment in plant and \u00admachinery as a criterion.<\/p>\n Importantly,<\/strong> the composite definition has assumed a turnover of five times the investment for the three categories of enterprises. Such an assumption does not consider the varied nature of the \u00adMSMEs.<\/p>\n For certain sectors, the gems and jewellery sector, for example<\/strong>, a huge turnover is achieved due to the very \u00adnature of the final product, even with a much smaller investment in plant and machinery.<\/p>\n Similarly,<\/strong> a leather unit, which is a highly labour-intensive sector, can achieve a much higher turnover with low capital investments. On the other hand, there are sectors that have higher capital investments but lower turnovers. These aspects would be of importance to certain industrial sectors and would \u00adrequire attention so that the sectors that are particularly important to employment generation do not fall out of the\u00a0MSME\u00a0ambit.<\/strong><\/span><\/p>\n The employment criteria:<\/strong><\/span>\u00a0The Annual Report 2018\u201319 released by the Ministry of\u00a0MSMEs\u00a0estimates that there are around 634 lakh unincorporated non-agricultural\u00a0MSMEs\u00a0based on the 73rd National Sample Survey (NSS) in 2015\u201316. About 31% units are in manufacturing, 36.3% in trade, 32.6% in other services, and a minuscule proportion in non-captive electricity generation and transmission. These provided a total \u00ademployment of 11.1 crore in 2015\u201316 (with 32.5%, 34.8%, 32.6% and 0.01% in the four categories respectively).<\/p>\n These are the \u201cunorganised sector\u201d enterprises alone, and excludes those\u00a0MSMEs\u00a0that would be registered under (i) Sections 2(m)(i) and 2(m)(ii) of the Factories Act, 1948; (ii) Companies Act, 1956 [together understood as the \u201corganised manufacturing sector\u201d where data is collected through the Annual Survey of Industries]; and (iii) the construction acti\u00advities falling under Section\u00a0F\u00a0of National Industrial Classification (NIC) 2008.<\/p>\n The fourth census of\u00a0MSMEs,\u00a0though dated, could provide a sense of proportion of the\u00a0MSMEs\u00a0in the organised (or registered) and the unorganised (or unre\u00adgistered) sector, sho\u00adwing that the bulk of the\u00a0MSMEs\u00a0(more than 94%) would be in the unorganised sector.<\/p>\n The organised and the unorganised sectors in India, however, are understood by an employment-based criterion, where registration under the Factories Act, 1948 (\u201cthe organised sector\u201d) would mean an employment of 10 workers or more if working with electricity and 20 workers or more if working without \u00adelectricity.<\/strong><\/span><\/p>\n Thus, it should have been easy to \u00addefine the\u00a0MSMEs\u00a0in India, too, as per the international norms, by the employment criterion. The stated reason for not \u00adapplying this criterion to define\u00a0MSMEs\u00a0in India is the shifty nature of employment that the\u00a0MSMEs\u00a0generate, and the flexibility it has, to take care of its business cycles through non-permanent, causal, contractual, and\/or daily piece-rate workers. The employment criterion is seen as a problematic measure to \u00addefine\u00a0MSMEs\u00a0in India, due to the difficulties in counting this nature of non-permanent, highly flexible labour.<\/p>\n Neglect of Micro Enterprises<\/strong><\/p>\n The\u00a0NSS\u00a073rd round found that 99.5% of these unorganised units are in the micro category of enterprises as per the erstwhile definition of\u00a0MSMEs. The micro sector with 630.52 lakh estimated enterprises provides employment to 1,076.19 lakh persons, which accounts for around 97% of total employment in the unorganised sector<\/p>\n It is thus important to gauge the needs and policy directions for the micro sector separately from\u00a0the much larger\u00a0SMEs. Except for lip service,\u00a0so far, not much attention has been paid\u00a0exclusively to the micro sector\u2019s viability,\u00a0working capital requi\u00adrements, credit leveraging capacities, or its market access.<\/strong><\/span><\/p>\n The new composite criterion expands the micro category to an investment size of\u00a0`1 crore (from the erstwhile\u00a0`25 lakh) and a turnover of\u00a0`5 crore. This essentially means that a number of units, which are much larger will now be clubbed together under the micro category itself. The possibility of a focused attention to this sector will be further diluted, both in terms of understanding the sector\u2019s requirements, as well as the data collected.<\/p>\n This enlargement of the universe of the\u00a0MSMEs\u00a0is being implemented at a time\u00a0when the global economy is at a standstill\u00a0due to a pandemic that has left the Indian\u00a0economy, and particularly the\u00a0MSMEs, with an extremely uncertain future. While the government has claimed that the definitional changes \u00adrespond to the fear of the\u00a0MSMEs\u00a0outgrowing the investment thresholds and thus losing benefits, the increased limits at this juncture only allow the bigger units to come under the\u00a0MSMEs\u00a0ambit to avail benefits.<\/p>\n COVID-19 and State Response<\/strong><\/span><\/p>\n The central government, in recognition of the near complete disruption of economic activities of the\u00a0MSMEs, has app\u00adroved a set of measures to help the sector. These are in the form of collateral free automatic loans to the tune of\u00a0`3 lakh crore over the next five months, fully guaranteed by the government; subordinate debt for stressed\u00a0MSMEs\u00a0and partial credit guarantee schemes; and funds to provide equity for\u00a0MSMEs\u00a0for stock exchange listing. While there is global recognition that this economic \u00adrecession needs a demand-side fix, the government has essentially decided to infuse liquidity, a supply-side solution.<\/p>\n Limited number of beneficiaries:<\/strong><\/span>\u00a0A small number of firms can actually reap the benefits from these schemes. The only firms eligible for collateral free loans at concessional rates are those that already have an outstanding loan. These 45 lakh firms, that is, only around 7% of the total estimated\u00a0MSMEs, could borrow 20% of their outstanding credit as on February 2020.<\/p>\n While allocated funds for equity could be a measure to help medium-sized enterprises in normal times, in an emergency such as the present, these do not make much sense. Also, as mentioned before, the enlargement of the definition of\u00a0MSMEs\u00a0further marginalises the smaller enterprises and allows larger firms to come into the ambit of medium enterprises.<\/p>\n Similarly, while the announced\u00a0`20,000 crore of subordinated debt for stre\u00adssed\u00a0MSMEs\u00a0would provide some relief and be much appreciated in normal circumstances, there is the possibility of a greater number of firms accumulating stressed assets (non-performing assets) due to inadequate demand.<\/p>\n Effective demand:<\/strong><\/span>\u00a0Firms that are in dire need of a fix to their demand problem4\u00a0are asked to borrow more, albeit on easier terms, to tide over the crisis. However, without adequate orders, firms would not be willing to borrow more (Purohit 2020). The finance minister has also acknowledged that firms were urging banks to not disburse sanctioned loans. Clearly, when millions of people have lost employment and purchasing power in the midst of a pandemic, firms would not want to produce more goods without effective demand. They are well aware that supply does not create its own demand, and hence would not be willing to borrow more. This causes a vicious circle, where lower production leads to a further reduction of employment opportunities and a further compression of demand.<\/p>\n Closing the Gaps<\/strong><\/span><\/p>\n An important announcement that could actually help the\u00a0MSMEs\u00a0right away is the repayment of dues owed to them by the central government and the private sector that are to the tune of\u00a0`5 lakh crore (Magazine and Sasi 2020). Instead of loans, the\u00a0MSMEs\u00a0that suffer from a dearth of working capital as well as delayed payments would be benefited if their dues are paid promptly. On 13\u00a0May 2020, the government promised to pay the\u00a0MSMEs\u00a0their dues within a span of 45 days. Along with this, the\u00a0GST\u00a0refunds need to be\u00a0expedited. These measures would make the units\u00a0atmanirbhar<\/em>\u00a0(self-dependent).<\/strong><\/p>\n A public provision for at least a partial wage guarantee for\u00a0MSME\u00a0workers for the period of lockdown and for three months after the lockdown could help the employers and generate incomes.<\/p>\n Without adequate orders, units will produce less and employ fewer people, making some form of government-backed wage guarantee important in this situation.<\/p>\n The Supreme Court has already ordered that the units that do not pay full wages to their workers during the lockdown\u00a0cannot be prosecuted (Rautray 2020). To be going out of business (particularly for small businesses) and being prosecuted hardly seems fair.<\/p>\n Also, a huge majority of\u00a0MSMEs\u00a0employ contractual, piece-rate paid labour. It would not be difficult for the employers to decline wages as workers would not have adequate papers to show an association with the enterprise. A wage guarantee progr\u00adamme becomes important in this context.<\/strong><\/span><\/p>\n A bailout from paying electricity char\u00ad\u00adges at least partially for a certain period of time would greatly help the\u00a0MSMEs. Only infusing liquidity would not help small businesses and could lead to a further deterioration of the twin balance sheet crisis that is sure to emerge if demand does not revive.<\/p>\n \u00a0<\/strong><\/p>\n For more such notes, Articles, News & Views Join our Telegram Channel.<\/strong><\/span><\/p>\n![\"Drishti](\"https:\/\/www.drishtiias.com\/images\/uploads\/1588751350_image1.png\")
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