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The Importance of MSMEs in Indian Economy

Anshu Gupta (CA-Final) 
on 23 May 2020

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What are MSMEs?

The Govt. of India has enacted the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 on June 16, 2006 which was notified on 2nd October, 2006 to deal with the definition of MSMEs. The Enterprises are defined in terms of Investment in Plant and Machinery/ Equipment by both Manufacturing & Service Sector.

The limit for investment in plant and machinery or equipment for Manufacturing/ Service enterprises was notified vide S.O. 1642(E) dtd.29-09-2006. On 13th May, 2020 Government has announced the Atmanirbhar Bharat package under which the limit for investment is revised due to the pandemic of Corona Virus in India.

MSMEs -  The Importance in Indian Economy
 

Classification

Micro

Small

Medium

Manufacturing &

Services

Investment < 1 cr. &

Turnover < 5 cr.

Investment < 10 cr. &

Turnover < 50 cr.

Investment < 20 cr. &

Turnover < 100 cr.

Activities specifically excluded from the definition of MSME Act, 2006

Ministry of Micro, Small and Medium Enterprises (MSME) has clarified as per notification S.O 2576

(E) dated 18.09.2015 and subsequent notification no S.O 85(E) dated 10.1.2017, activities that would be specifically not included in the manufacturing/ production of commodities or rendering of services as per Section 7 of the said Act i.e.

1. Forest and Logging,
2. Fishing and aquaculture,
3. Wholesale, retail trade and repair of motor vehicle and motorcycles,
4. Wholesale trade except for motor vehicles and motorcycles,
5. Retail Trade Except of Motor Vehicles and motorcycles,
6. Activities of households as employees for domestic personnel,
7. Undifferentiated goods and services producing activities of private households, and
8. Activities of extraterritorial organizations and bodies.

Benefits of MSME Registration:

There are many advantages of obtaining MSME registration, the Indian government has always been in favor of providing benefits to MSMEs, some of them are listed below:

1. Protection against delayed payments from debtors,
2. Up to 1% deduction on Interest rate on overdraft facility from Bank,
3. Allowed credit for minimum alternate tax (MAT) to be carried forward for up to 15 years instead of 10 years,
4. Collateral Free Loans from bank (in case of specific category loans) i.e. no need to provide security to obtain loan from bank,
5. Concession on Electricity bill by making an application to the electricity department,
6. 50% discount on patent & trademark registration,
7. Reimbursement on ISO certificate charges,
8. Access to apply for tenders which are open exclusively for MSME Industries.

Various MSME Schemes launched by Government

Some of the MSME Schemes launched by the Government are: -

1. Udyog Aadhar Memorandum

With this scheme, registration is done completely online by using only two forms: - Entrepreneur Memorandum-I and Entrepreneur Memorandum-II replacing the 11 forms of the previous process. MSME can register through this scheme by using Aadhar & are entitled to various MSME benefits.

2. Zero Defect Zero Effect (ZED)

This scheme aims to manufacture goods that have ‘zero defect’, hence better-quality products and has ‘zero effect’ to manufacture goods in an environmentally friendly way. This scheme addresses various issues of quality of goods that are manufactured & exported and fulfill ecological needs of the countries. After ZED assessment, MSMEs can reduce wastages, increase productivity, expand their market as IOPs, become vendors to CPSUs, have more IPRs, develop new products and processes etc.

3. Quality Management Standards & Quality Management Tools

This scheme will help the MSMEs to understand and implement the quality standards that are required to be maintained along with the new technology. With this scheme, MSEs will become more competitive and produce better quality products at competitive prices. By implementing QMS like ISO 9000/18000/22000 and QTT like: Six Sigma, TQM, TPM etc. in certain sectors or group of industries, the performance of the industries and reduction of rejections & customer’s complaints, etc. will result in improving the performance of the MSEs.

4. Grievance Monitoring System

This scheme is launched to monitor and cater all types of complaints and suggestions by MSME owners. It aims to make the system of grievance handling transparent and fast. Grievance and complaint lodging is a completely online process. One can track the status of their complaint and there is a unique registration number attached to each complaint and the system keeps updating the progress of the complaint on a regular basis.

5. Incubation

The main objective of this scheme is to promote & support new and innovative ideas such as new designs and new products. The government provides financial assistance to Host Institutions (HI) which are exploring and implementing new ideas in their respective service sectors. The financial assistance of upto Rs. 1 crore for purchase & installation of Plant & Machinery, and upto Rs. 15 lakh per idea for developing & nurturing the ideas shall be provided.

6. Credit Linked Capital Subsidy Scheme (CLCSS)

This Scheme aims at facilitating technology up-gradation by providing 15% capital subsidy upto Rs. 15 lakhs (provided maximum investment in approved machinery is Rs. 1 crore) to MSE units including tiny, khadi, village and coir industrial units on institutional finance availed by them for making a well-established and upgraded technology.

7. Women Entrepreneurship

This scheme takes care of women who may not have adequate educational background for handling entrepreneurship and hence provides training in such fields. The government provides capital, counseling and training to these women so that they can manage their business and expand it. Under the scheme, women entrepreneurs are covered under Special Category and are entitled to 25% & 35% subsidies for the project set up in urban and rural areas respectively.

Other Major Support available to MSMEs: -

Collateral Free Borrowings

The Ministry of MSME, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) with a view to facilitate flow of credit to the MSE sector without the need for collaterals/ third party guarantees. The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of an MSE unit which availed collateral free credit facilities, fails to discharge its liabilities, the Guarantee Trust would bear the loss incurred by the lender up to 85% (or 80%/75%/50% depending upon the credit exposure) of the outstanding amount in default. The CGTMSE would provide cover for credit facilities up to Rs. 200 lakhs without collateral/ third party guarantees.

Technology and Quality Upgradation (TEQUP)

Under TEQUP scheme, a capital subsidy of 25% of the project cost subject to a maximum of Rs. 10 lakhs for project cost of Rs. 40 Lakh shall be provided for implementation of Energy Efficient Technology (EET) to MSMEs, the balance amount is to be funded through loan from SIDBI/banks/financial institutions.

Also, in this scheme, MSME manufacturing units will be provided subsidy to the extent of 75% of the actual expenditure incurred by them for obtaining Product Certification Licenses. The maximum GOI assistance allowed per MSME is Rs.1.5 lakh for obtaining product licensing /Marking to National Standards and Rs. 2 lakhs for obtaining international certification.

Cluster Development & Skill development

To support the growth of MSEs, Government of India (GOI) has adopted the Cluster Development Approach as a key strategy to enhance the productivity & competitiveness for the improvement of technology, skills, market access to setup Common Facility centers for training & testing and to create infrastructure facilities in the new/ existing Industrial areas or Cluster of MSEs. Various types of training programmes are conducted for self-employment as well as wage employment. For Monitoring of the programme, a web-based system has been developed where coordinator of the programme is bound to feed all details of trainees including his photo and phone no. on the website.

Steps taken under “Atmanirbhar Bharat Scheme”

Collateral Free Loans to Businesses including MSMEs

Automatic Loan to businesses/ MSMEs from Banks & NBFCs 2020 shall be provided up to 20% of entire outstanding credit as on 29th February 2020, subject to condition that existing borrowers having outstanding loan of up to Rs. 25 cr and turnover up to Rs. 100 cr are eligible to avail this scheme and loans to have tenure of 4 years with moratorium of 12 months on principal repayment. This scheme can be availed till 31st October, 2020 with no guarantee & no fresh collateral securities.

Subordinate Debt for Stressed MSMEs

Due to the Coronavirus in India, stressed MSMEs are facing a problem of Equity in their businesses. To overcome such situation, Government of India will facilitate provision of Rs. 20,000 cr as Subordinate debt by providing a support of Rs. 4,000 cr to CGTMSEs. All the functioning MSMEs which are NPA or are stressed are eligible to avail the benefit of this scheme. Promoters of the MSME will be given debt by Banks which will then be infused by promoters as equity in the Business.

Equity Infusion through Fund of Funds

In order to provide equity funding for MSMEs to grow potentially, there will Fund of Funds (FoF) which will be operated through a Mother Fund and few daughter funds. Fund structure will help leverage ₹ 50,000 cr of funds at daughter funds level. It will help to expand MSME size as well as capacity. Such an initiative will encourage MSMEs to get listed on main board of Stock Exchanges.

Global tenders to be disallowed

Global tenders will be disallowed in Government procurement tenders up to Rs 200 crores. This a step to support Make in India & to help MSMEs to increase their business.

Proposed Action Plan of the Ministry for Next 3 Months to Combat the COVID crisis:

Meeting Delivery Schedule

In order to mitigate the liability of paying Liquidated damages for delay in execution of project, non- submission of project reports on time & on the occurrence of any default in product/ services; Department of Public Enterprises (DPEs), Railway Board and other Ministries have been approached to allow relaxation in applicability of Liquidated Damages clause for a period of two months from the schedule date of delivery/execution of order.

Delayed Payments

Department of Public Enterprises (DPE), Railway Board will be approached for immediate intervention and release of all pending payments by Central Public Sector Enterprises (CPSEs) and Railways to the MSMEs, even if the related matter is pending with Micro and Small Enterprise Facilitation Council (MSEFC).

Meeting Fixed Cost

The State Government will take initiatives to exempt/reimburse the electricity and other fixed charges during this Lockdown period.

Escalation of Raw Material Prices

In the post COVID-19 period, it will be obvious for MSMEs to face challenges from rising raw material prices. To overcome such a situation, the Ministry of Finance considered reduction in GST rates on raw materials to partially compensate for the price escalations.

Credit Support for MSMEs

1. Moratorium period of 6 months for repayment of MSME loans and other forms of debts, together with a provision of 'no change' in the credit rating during the said period.

2. Norms for declaring NPA period in banks be extended to 180 days for at least next 2 years as the MSMEs need uninterrupted banking assistance to deal with this crisis situation.

3. Interest rate subvention @ 3% on loans to MSMEs that are healthy and not NPAs.

 

CONCLUSION

Micro, Small and Medium Enterprises contribute to economic development of India in various ways such as employment generation, providing goods and services at affordable costs. The current Market value of Indian MSMEs is $1 trillion which is expected to double by the end of year 2022. MSMEs contribute around 30% of the national GDP & 45% of the overall exports from India. The Government of India has taken various initiatives to make this sector a more vibrant and significant player in development of the Indian economy. The financial incentives introduced under Atmanirbhar Bharat Scheme will rescue MSMEs under the impact of lockdown & provide much needed liquidity to this sector but all this will may fall flat because the nation is facing issue of migration of labourers and companies have been stripped of its workforce. Labour reforms should be defined as most of them have gone back home and it’s unlikely, they will return soon.

 

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