New MSME classification: some cheer, some fear

On February 7, 2018, the Union Cabinet had approved changes in the classification norms for Micro, Small, and Medium Enterprises (MSMEs) from ‘Investment in plant & machinery and equipment’ to ‘Annual turnover’.

In this regard, the MSMED (Amendment) Bill 2018 was introduced on July 23, 2018, in the monsoon session of the Parliament by MSME Minister Giriraj Singh.

How does the new classification of MSMEs differs from the old

The new definition differs in two ways.

First, it classifies an enterprise on the basis of annual turnover only. On the other hand, the olderdefinition (from Micro, Small, and Medium Enterprises Development Act, 2006) classifies an enterprise into micro, small or medium on the basis of the investment made in plant and machinery, if it belongs to the manufacturing sector, or in equipment, if it belongs to the service sector.

Second, it does not use different investment levels for classifying a service and a manufacturingsector unit.

Before we analyse further the new move of the government, it is pertinent to ask why defining MSMEs is important?

MSME sector is critical in meeting the national objectives of generating employment, reducing poverty, and slowing rural-urban migration. Therefore, having an appropriate definition will help in directing the benefits to the intended beneficiaries.

The 2006 rules require self declaration of the investment made in plant/machinery and equipment. This is prone to manipulation as one can under-report the asset value, so that the incentives available as an MSME do not stop.

Why does the government wants to adopt a new approach for classification?

The government is of the view that the new norms for classification will:

1. Increase ease of doing business

1. Propel growth

1. Be in alignment with the GST regime

Let us see what various stakeholders think of the government's claim

The votary

Anil Bhardwaj, Secretary General FISME

Why FISME thinks that the new move could prove to be “a shot in the arm”?

1. With the continued erosion of the value of the rupee, the investment thresholds set up in 2006 have become impractical and need a steep increase.

1. At present, many large enterprises under-report the investment, get CA certificates and take part in the public procurement earmarked for MSMEs. With the new definition, it will not be possible as turnover can be always cross-checked through platforms like MCA 21 and GSTN.

1. With the investment-based definition, many modern MSMEs belonging to pharmaceuticals, auto-components, and food processing sectors will soon come out of the purview of MSME as they require huge investments to remain compliant of the new and mandatory industrial standards.

1. The 2006 rules have created an uneven playing field between an old and a new MSME. Producing a product today would require much more investment than what it would have taken a decade ago.

“We share the government’s view too. Overall, the new definition is a vast improvement over the earlier definition and should help MSMEs face new challenges in a better frame,” said Anil Bhardwaj.

The dissenter

Ashwani Mahajan, Co-convener Swadeshi Jagran Manch, vehemently opposed the new rules. Making sharp remarks on bureaucracy and MNCs, he exclaimed, “There has always been an effort from the bureaucracy, corporate houses, and even foreign players to get the rules tweaked. This fight has been going on for long, since the time of IK Gujral when the investment limit was raised to Rs 3 crore.”

Swadeshi’s rationale behind opposing it

1. Small scale industries have been incurring losses continuously. With the new definition, people doing trading would get incorporated into MSME. Moreover, the levels set are too high, further increasing those eligible for MSME. The benefits, this way, would not reach the real small scale industries.

1. On the basis of a pure turnover-based definition, people will move towards trading and will leave manufacturing. This stands in stark contrast to the ‘Make in India’ campaign.

He concluded by saying, “If I am informed correctly, the Bill will not be pushed in the Parliament, at least in this session.”

What next?

The monsoon session concluded on Aug 10, and even though it was the most productive session since the year 2000, with Lok Sabha recording a productivity of 118%, the MSME Bill could not get through.

With many media reports stating that the RSS-affiliated organisations want the status quo to be maintained on the MSME definition, it would be interesting to see how the government walks the tightrope ahead of the 2019 General Elections.