General Studies Paper 3 (Indian Economy): Critically analyse the recent changes in policies for the MSMEs sector in India.

msme sector

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Syllabus: General Studies Paper 3 (Indian Economy)

 

Critically analyse the recent changes in policies for the MSMEs sector in India. (10 Marks)

Sample Answer:

Introduction:

Micro, small and Medium Enterprises (MSMEs) are one of the most vibrant and sensitive sectors in Indian economy. The significance of Micro, small and Medium Enterprises (MSMEs) is attributable to its capacity of employment generation, low capital and technology requirement, use of local resources, mobilization of resources and exportability of products.

Body

With the introduction of reform measures in India since 1991, the Govt. has withdrawn many protective policies for the Micro, Small and Medium Enterprise (MSMEs) and introduced promotional policies to increase competitiveness of the sector.

  • Though globalization process has expanded the market facilitating supply of superior technology, this has also forced the MSMEs to face ruthless competition from large domestic firms and the MNCs.
  • The sector has undergone several changes regarding definition.
  • The Small Scale Industries (SSI) has been renamed as Micro, Small and Medium Enterprises (MSMEs) with the introduction of MSMED Act, 2006.
  • The Micro, Small and Medium Enterprises (MSME) are classified into two categories.
    • Manufacturing Enterprises– The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951. The Manufacturing Enterprise is defined in terms of investment level in plant & machinery.
  • Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as notified are as under:
Manufacturing sector
Enterprise Investment in plant and machinery
Micro enterpriseDoes not exceed 25 Lakhs rupees
Small enterpriseMore than 25 Lakhs but does not exceed five crore
Medium enterpriseMore than five crore but does not exceed ten crore rupees
Service sector
Micro enterpriseDoes not exceed  10 lakhs rupees
Small enterpriseMore than 10 lakhs rupees does not exceed 2 crore
Medium enterpriseNot exceed five crore rupees

 

 

Recent changes in MSME policy:

From time to time, the MSME sector has been raising a demand for revision / amendment in the MSME definition. Recently the Cabinet has approved a draft which proposes to change the definition of MSMEs.

  • The new policy proposes to define MSMEs on the basis of annual sales turnover
  • There is no distinction between manufacturing and service unit.
 
Enterprise Annual sales turn over
Micro enterpriseUp to Rs 5 crore rupees ((Rs 50 mn)
Small enterpriseUp to Rs 75 crore rupees(Rs 750 mn)
Medium enterpriseUp to Rs 250 crore (Rs 2.5 bn)

 

Advantages of recent changes in MSME Policies

  • This will encourage ease of doing business, make the norms of classification growth oriented and align them to the new tax regime revolving around GST (Goods & Services Tax). 
  • The Turn-over based criterion resolves many of the ills of earlier regime. It is transparent, as authorities could always cross check the turnover through platforms such as GSTNNo CA certificate would be required.
  • It also levels the field for new and old enterprises as the comparison is not between historical investments and current investments but between current turnovers.
  • It would be realistic also: after inflation adjustment the definition of small enterprise on the basis of investment would have been Rs 15 core today. Keeping turnover five times the investment, a very conservative figure.
  • The consequent growth will pave the way for increased direct and indirect employment in the MSME sector of the country.

Disadvantages:

  • There are few sectors where investment is low but turnover is high for example gems and jewellery units. They enjoyed benefits under Public Procurement Policy for MSEs which mandates 20% set-aside for Micro and Small Units in all central government purchases. Suddenly, the reserved pie of the cake is out of their reach. The PPP for MSE would not be available for units having more than Rs 75 crore annual turnover.
  • Keeping in view that in the proposed thresholds, there would be hardly any Micro and Small unit that could participate in high volume government tenders, it has been proposed by FISME that where smaller units have not bid, the reserved category benefits could be passed on to Medium enterprises.
  • India still does not take into account the number of people employed. Globally, the two most important elements used to define MSMEs remain turnover and employment.

CONCLUSION:

One criticism about the new definition is that India still does not take into account the number of people employed. Globally, the two most important elements used to define MSMEs remain turnover and employment. the decision for not including the employment criterion may be because of inability of the system to cross check employment figures in a transparent manner. The practice of underreporting number of people employed is widespread especially in smaller units to remain below the threshold of 10 employees to save on very high social security and compliance costs. Lack of labour reforms has exacerbated the situation. Adding such a criteria would have led to more paper work and corruption

 

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