MSME: A Sector in Transition

The Micro, Small & Medium Enterprises (MSME) sector is an important piece of India’s legacy economic model and forms part of the critical supply chain for products and services. The sector is a job creator and plays a crucial role in providing large-scale employment and industrialization of rural and backward areas. According to the National Sample Survey (NSS) 73rd round, for the period 2015-16, there were 633.8 lakh unincorporated non-agriculture enterprises in the country, engaged in different economic activities, providing employment to 11.10 crore workers. The need of the hour is to create an enabling environment for them to invest and grow, creating jobs and pushing the demand and growth. Various announcements made by the Government recently in terms of budgetary allocations and appropriate policies for the MSME sector have hit the target, with several solid reforms initiated to boost the growth and prosperity of small enterprises in the coming years.

The first big step is the reduction of the corporate tax rate to 25% for companies with an annual turnover up to Rs 250 crores, from Rs 50 crores. This would leave more investable resources with 99% of the 7 lakh firms which file tax returns. This would enable them to not only reinvest and expand, but also help them to spend more on research and development, which is crucial for their competitiveness. Corresponding to the announcement of lowering the corporate tax, the Government has also changed the criteria to define MSMEs from investment in ‘plant and machinery/equipment’ to ‘annual turnover.’ As per the new classification, a micro enterprise will be defined as a unit with annual turnover less than or equal to Rs 5 crores, a small enterprise with annual turnover more than Rs 5 crores and less than Rs 75 crores, and medium enterprises with annual turnover of more than Rs 75 crores and less than Rs 250 crores. This was a long-standing recommendation of CII, and it is expected that the revised ‘turnover’ norms will bring scale, skill, sophistication and speed to the sector. The classification will align MSMEs with the GST regime, while also supporting the ‘ease of doing business’ in the sector, improve competitiveness, and support the integration of Indian MSMEs into global value chains (GVCs).

Further, MUDRA, demonetization, and the Goods and Services Tax (GST) have rapidly started the process of formalization. Since its launch in April 2015, the MUDRA Yojana has led to a sanction of Rs 4.6 lakh crores of credit to 10.38 lakh beneficiaries. It is also a great initiative for financial inclusion and equitable development, as 76% of the loan accounts are of women, and more than 50% belong to the Scheduled Caste, Scheduled Tribe and OBC groups. Hence, the budget is appropriate in its focus to accelerate formalization by further expanding the reach of MUDRA, with the allocation of Rs 3 lakh crores, a nearly 20% rise from last year’s allocation of Rs 2.44 lakh crores. The Finance Minister, in his budget speech, spoke about introducing ‘fixed term employment’ in all sectors, which will further support MSMEs to enhance their human resources and thus, productivity.

High Non Performing Assets (NPAs) remain a pressing issue for the country. MSMEs have been in the pincer grip of the NPA crisis and the transition impacts of demonetization. The Economic Survey 2017-18 revealed that the sector-wise NPAs of banks till March 2017 indicate that MSMEs had 11.8% (658 billion) share in total NPAs by public sector banks in the priority sector. CII has been advocating to the Government to increase the SMA-1 (Special Mention Account) from 90 to 180 days to boost transition support to MSMEs. To solve the issue of NPAs for MSMEs, (which, according to Government estimates, are saddled with Rs 80,000-crore stressed loans), the Government has relaxed the norms for nonperforming asset categorization from the current 90 days to 180 days. In addition, the Government also proposes to revamp the system of online sanctioning of loans to MSMEs, including the Online Trade Receivable Discounting System (TreDs) to be linked with GSTN, wherein all required information will be available on the GSTN Portal. It will help to grant loans quickly, reduce processing time and late payments, and increase working capital and investments, together with creating a financial database.

It is important that our development efforts must be complemented by technological innovations that extend the reach of knowledge and learning to the remotest corners of the country. Facilitating the ease of doing business will help Indian MSMEs take advantage of the emerging business opportunities. The Government of India has identified 372 basic business reforms to be taken up by the States in action mode. By bringing ease of doing business to MSMEs spread across the geographical expanse of the country, India can notch a much higher ranking in terms of ‘Ease of doing business.’ Further, many global companies are increasingly looking to Indian MSMEs for strategic partnerships of mutual benefit, due to the innovative capabilities of the latter, their ability to speedily absorb new technologies, and the availability of local skills.

MSMEs constitute the backbone of the economy. The clear continuation on the roadmap for transforming MSMEs into more competitive, efficient and globally connected enterprises, with continued support and handholding, with sustained focus, will go a long way towards job creation, and adding to India’s growth trajectory.


Article by:
Mr. Shreekant Somany
Chairman, CII National MSME Council, and
Chairman & Managing Director, Somany Ceramics Ltd


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