/Economic Survey 20-2021 reveals Government’s rationale behind revising the definition of MSME

Economic Survey 20-2021 reveals Government’s rationale behind revising the definition of MSME

One of the interesting takeaways of the Economic Survey 2020-21 tabled today is the fact that it also revealed the government’s rationale for the revision in the definition of MSMEs made in June last year.

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 had defined MSMEs, based on investment in plant and machinery or equipment. Such an investment based criteria was to be calculated at the original price thereof. This had disadvantaged the sector as it disincentivised investment and prevented the MSMEs to reap the benefits of economies of scale and contribute more significantly to employment generation, the economic survey ’21 states.

To address this anomaly, In June-2020, GoI revised the investment limits upwards and also included annual turnover of the enterprise as the additional criteria for the classification of MSMEs.

The need for a change in definition, that’s aimed at offering small firms the incentives to grow and thereby reap economies of scale was argued for in the Economic Survey 2018-19 too.

The need for the revision in the MSME definition was evaluated and announced after stakeholders’ consultation and due diligence following the provision of MSMED Act, 2006, the latest survey says, adding the Economic Survey (2012-13 and 2018-19) also highlighted the need for revamping the ecosystem for the MSMEs.

“The upward revision in investment criteria is expected to make MSMEs globally competitive and facilitate robust expansion of the MSMEs in the country. It will help in unleashing the economies of scale in production without the fear of forgoing the benefits of an MSME unit,” the survey says.

Disclosing important signposts in the history of the said changes, the survey reveals that the government had also attempted to amend the MSME Act in 2015 and 2018. The survey adds that the 2015 Bill proposed an upward revision in investment ceiling limits, whereas the 2018 Bill attempted to replace investment criteria with turnover criteria and remove the distinction between manufacturing and services.

It further mentions that the Department-Related Parliamentary Standing Committee (DRPSC) on Industry (2015) had in its 245th Report extensively examined the implementation of the MSMED Act, 2006 and had generally agreed to enhance the investment limits for the classification of MSME sector because of inflation. It had observed: “Considering the inflation and dynamic market situation, the Committee feels that the definition of MSMEs as provided in the Act may be revised every five years.”

The DRPSC on Industry (2018), carefully evaluated the 2018 Bill and had mentioned in the report that the “classification based on investment in plant and machinery has several disadvantages as it prevents MSMEs to become competitive in the market, inhibits investment to modernize, upscale, improve productivity and technology upgradation due to rigour of investment thresholds.’’

The DRPSC report (2018) further mentions: ‘…the extent of financial limits fixed in 2006 for MSMEs are no longer relevant, given the impact of inflation, says the survey.

Most of the Industry Associations and stakeholders have, therefore, expressed the need for changing the present criteria of investment in plant and machinery to annual turnover as a criterion for classification of MSMEs.’

The DRPSC report (2018) also says: ‘… the problem with employment criteria in the Indian context is the non-availability of reliable/verifiable sectoral data and the seasonal variance in labour engagement.

Moreover, the employment system, if taken into consideration, will increase the need for inspection, which will involve huge transaction costs and could place a question mark on the veracity of the figures given by the enterprises in different sectors. It will also lead to a large number of litigations, noted the government.

The RBI also constituted an Expert Committee on Micro, Small and Medium Enterprises (2019) which also recommended using the annual turnover as the criteria instead of the investment based criteria.

The said committee debated the merits of an employment-based definition and recognized that while this was an additional feature preferred in some countries, this definition would pose challenges in implementation. Thus, based on the latest observations of the DRPSC and consultations with stakeholders, the criteria were changed and the notification dated 26th June, 2020 was issued.

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