The ministry of commerce has clarified the foreign direct investment (FDI) limits in micro, small and medium enterprises (MSMEs). Press Note 6, issued on 4 September, permits FDI in MSMEs, subject to sector-specific equity caps and regulations. The note also stipulates that all Industrial Undertakings producing items reserved for manufacture by the MSME sector would require an industrial licence, and restricts FDI in such Industrial Undertakings to a maximum of 24% without prior government approval.
These clarifications were issued close on the heels of the Prime Minister’s 26 August meeting with representatives of the MSME sector. In fact, they appear to further the Congress party’s pledge of a new deal for MSMEs and its commitment to give special focus to these enterprises. A similar commitment of the United Progressive Alliance government led to the enactment of the Micro, Small and Medium Enterprises Development Act, 2006 (the Act). This Act aims to ensure the timely and smooth flow of capital to MSMEs, thereby facilitating higher productivity and competitiveness. Since the introduction of the Act, MSMEs have constantly registered high growth rates compared with other industrial sectors. This is hardly surprising, given that these enterprises account for almost 45% of India’s manufacturing output and 40% of our total exports.
But despite their contributions and policymakers’ genuine attempts to assist them, MSME associations continue to push for simplification in compliance with labour laws, the necessity to establish an SME exchange and the need for additional finances from the Small Industries Development Bank of India (Sidbi). Moreover, under the current economic conditions, the unorganized sector urgently needs funds and would welcome a reduction in interest rates to bring them at par with the lending rate available for the agricultural sector. Taking note of these concerns, the Prime Minister announced constituting a high-level Task Force to examine the issues raised and come up with an action agenda. Presumably, this Task Force will work closely with the National Board, which the 2006 Act established and authorized to make recommendations to the government for the promotion and development of MSMEs.
Interestingly, while the Union government has framed rules under the Act, in reality the primary responsibility for the development of MSMEs lies with states. On their part, state administrations have issued various notifications under the Act to facilitate these enterprises, which generate high rates of employment growth and provide a strong entrepreneurial base for the rural workforce. Statistics from the MSME ministry show that these enterprises employ an estimated 42 million persons spread over 13 million enterprises; the labour intensity in the MSME sector is estimated to be almost four times higher than other large enterprises. Thus, the commitments to this important sector are neither unwarranted nor unexpected.
Finally, as India looks to continue its economic dominance, it is important to improve the socio-economic conditions of the non-farm sector through a host of policy and other measures. As part of its review, the government should consider easing further investment norms for these enterprises and take definitive steps towards making them attractive for both domestic and foreign equity participation.
While the Prime Minister’s suggestion for these enterprises to explore finances from private equity or venture capital funds is laudable, eventually a domestic small-cap exchange—similar to the Alternative Investment Market at the London Stock Exchange—should be considered so that funds may be raised from local investors. Simultaneously, steps should be taken for improving the supply chain, providing access to newer markets and assisting MSMEs with better utilization of modern-day technology. It is these that will help achieve, in full measure, the objectives of the Act and ultimately guide the Congress to its social and economic objectives of a faster and more inclusive growth.
Satvik Varma is a senior corporate lawyer with Amarchand Mangaldas in New Delhi. Views are personal. Your comments are welcome at firstname.lastname@example.org