MSMEs: The growth engines of the Indian economy

Micro, small and medium Enterprises (MSMEs) are the growth accelerators of the Indian economy, contributing about 30% of the country’s gross domestic product (GDP). In terms of exports, they are an integral part of the supply chain and contribute about 40% of the overall exports. MSMEs also play an important role in employment generation, as they employ about 110 million people across the country. Interestingly, MSMEs are intertwined with the rural economy as well, as more than half of the MSMEs operate in rural India.

To ensure that MSMEs continue to lead the country towards economic growth, the Government of India has from time to time announced various schemes to support the development of this sector. Recently, in view of the economic hardship caused by covid 19, the government has announced few schemes under ‘Aatmanirbhar Bharat’ i.e. Self-reliant India initiative. Accordingly, the criterion for classifying MSME has also been revised. Under the revised criterion, the combined factors of ‘Investment in plant and machinery’ and ‘Turnover’ are required to be considered to determine whether a business should be classified as a micro, small or a medium enterprise. In contrast, earlier the classification of an MSME unit was based only its investment in plant and machinery; and also depending on whether the enterprise was in the manufacturing sector or in the services sector.

Classification of MSMEs

As per the new definition, various units will now be classified as below

· Micro enterprises - Investment of less than `1 crore and turnover less than `5 crore

· Small enterprises - Investment of less than `10 crore and turnover less than `50 crore

· Medium enterprises - Investment of less than `50 crore and turnover less than `250 crore

As a step towards ease of doing business in India, the government has decided that the export turnover will not be considered in the aforesaid turnover limits prescribed for MSME units.

‘Investment in plant and machinery’ would be calculated as per provisions under the Income-tax laws and the ‘Turnover’ would be considered as per the GST return. If an enterprise, which is classified in a particular category crosses the specified limits for either investment or turnover, it will be placed in the next higher category. On the other hand, an enterprise shall be placed in the lower category only if both investment and turnover fall below the ceiling specified for the relevant category.

Registration requirement

With effect from 1 July 2020, all existing MSMEs and the new MSMEs are required to obtain ‘Udyam’ registration which is a simple online registration based on self-certification. Aadhaar number is mandatory for obtaining the Udyam registration application.

The Aadhar number in case of a proprietor would be that of the individual. In case of a Hindu Undivided Family (HUF), the Karta’s Aadhaar number would be quoted and in case of partnership firm, it should be that of the managing partner.

In case of a company, a limited liability partnership, a cooperative society, a society or a trust, the Aadhar number of the authorised signatory of the relevant entity would need to be provided.

On completion of registration, an e-certificate namely ‘Udyam Registration Certificate’ will be provided to the MSME unit. Though Udyam registration for MSMEs is optional, there are various registration-based benefits that an MSME unit is eligible for, thereby supporting the case for obtaining such registration.

Benefit of obtaining MSME registration

One of the key benefits of registration as an MSME unit is that in case of Micro and Small enterprises, the payment for invoices is assured within 45 days under the MSME Act. In case the payment is not made to the MSME within 45 days, the buyer is liable to pay compound interest with monthly rests to the MSME on the invoice amount at three times the bank rate notified by the Reserve Bank of India.

Government departments and public sector companies are mandated to procure 25% of their requirement from MSMEs; therefore, the registration gives them an edge while submitting tenders in such cases.

Other benefits provided by the government include, scheme related to collateral / guarantee-free loans, Interest subvention scheme, schemes for market support and export promotion, concession in electricity bills, reimbursement of ISO certification charges, etc.

Keeping in view the current economic scenario, new initiatives have been announced by the government to provide some support to the MSME sector. These include schemes related to emergency funding, providing equity support promoting procurement from MSME sector, etc. The key schemes are outlined below.

Access to credit

Access to credit has been one of the foremost concerns for the MSMEs. With an intent to address this issue, the government has announced an emergency credit line to businesses/MSMEs, wherein loans up to `3 trillion are proposed to be sanctioned by banks/financial institutions. Under this scheme, 20% of the outstanding loan as on the cut-off date of 28 February 2020 will be guaranteed by the government, and banks will be able to lend without additional guarantees.

Subordinate debt scheme

As the ongoing pandemic has added to the financial strain faced by the MSMEs, promoters are unable to bring in equity funding. In order to assist the promoters, the government has come out with other measures around subordinate debt. The subordinate debt scheme seeks to extend support to the promoters by providing a debt facility of up to 15% of the promoter contribution or `75 lakh, whichever is lower. Under this scheme, banks will be able to fund the promoter’s contribution and the funding gets guaranteed by the government. This in a way is an equity support by the government, while banks are not taking any additional risk. The promoter, in turn, will infuse the amount in the MSME unit as equity and thereby enhance the liquidity and maintain debt-equity ratio.

Funds of Fund

The government has also announced a Funds of Fund Scheme with a corpus of `10,000 crore for providing financial relief and funding to MSMEs with growth potential and viability. This initial corpus of fund will be managed by a ‘mother fund’ to raise further corpus of `50,000 crore at levels of daughter funds.

Launch of CHAMPIONS portal

Launch of a new portal entirely dedicated to MSME sector is another positive step. The underlying objective is to help the MSMEs in terms of finance, raw materials, labour, permissions, etc. The portal also seeks to help MSMEs to tap into new opportunities including manufacturing of medical items & accessories combined with a long term view to identify the MSMEs with growth potential.

Faster clearance of payments by PSUs

In order to improve the liquidity status of MSMEs, the government has directed that the amounts due by the government and public sector units to be cleared within 45 days of acceptance of goods/services.

No global tenders up to `200 crore

The government has amended the General Financial Rules 2017 to disallow global tenders in government procurement up to `200 crore, as announced in the Aatmanirbhar Bharat package. This bold step is expected to create more opportunities for domestic players and will allow the local industry to gain from this initiative.

Recently, the World Bank has allocated about `5,600 crore ($750 million) emergency response funding to the MSME sector. This provides much-needed liquidity and supports the government’s strategy of using NBFCs and small banks to channelize funds to the MSMEs.

The World Bank is also working with the GOI on different fintech platforms, Trade Receivable System (TReDS) and other initiatives to facilitate credit to as many MSMEs as possible. With continued focus on MSMEs by the government, the sector is expected to continue with its role as the growth engine of the Indian economy, and providing employment to millions of un-skilled and semi-skilled people across the country.

Leena Madhok, director at Grant Thornton, contributed to this story.

Vikas Vasal is national leader(tax) at Grant Thornton, India