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In India, Micro Small and Medium Enterprises (MSMEs) were defined for the first time by the MSME Development Act of 2006. The two criteria for defining MSMEs were investment in plant and equipment for manufacturing and investment in equipment for services. Investments in land and building, costs of research and development and pollution control devices were excluded from the defining criteria.

In May, 2020, the government changed the basis of the definition of MSMEs. It followed a composite criterion, ­using both turnover and investment in plant and machinery. Another important change has been the elimination of the difference in investment thresholds between the manufacturing and the services sector.

Recent government help to save the MSMEs

The government announced certain measures to boost the MSME sector in May in order to tackle the ongoing economic crisis. These measures included collateral free automatic loans to the tune of Rs. 3 lakh crore over the next five months which will be fully guaranteed by the government and also ensured subordinate debt for stressed MSMEs and other partial credit guarantee schemes. It also included funds to provide equity for MSMEs for stock exchange listing. But many observers have doubts about the efficacy of these measures.  

Sangeeta Ghosh of the Institute of Studies in Industrial Development, New Delhi, points out in her article published in the May 30, 2020 issue of Economic and Political Weekly (EPW), “While there is global recognition that this economic ­recession needs a demand-side fix, the government has essentially decided to infuse liquidity, a supply-side solution.”

She believes that only a small number of firms can actually reap the benefits from these schemes. The only firms eligible for collateral free loans at concessional rates are those that already have an outstanding loan.

A national media reported that only 45 lakh firms - which is only around 7% of the total estimated MSMEs in India - could borrow 20% of their outstanding credit as on February 2020.  

Ghosh noticed that the stock exchange listing for SMEs (such as the SME platform Emerge of the Nati­onal Stock Exchange and Bombay Stock Ex­change SME) were only available for the largest of the SMEs, with only 190 and 299 listed companies on these platforms, respectively. This was as of May 24, 2019.

While allocated funds for equity could be a measure to help medium-sized enterprises in normal times, in an emergency such as the Covid 19 pandemic period, these did not make much sense. Ghosh believes that the enlargement of the definition of MSMEs further marginalises the smaller enterprises and allows larger firms to come into the ambit of medium enterprises.

Neglect of micro enterprises in the new definition

The NSS 73rd round found that 99.5% of these unorganised units are in the micro category as per the erstwhile definition of MSMEs. The micro sector with 630.52 lakh estimated enterprises provides employment to 1,076.19 lakh persons, which accounts for around 97% of the total employment in the unorganised sector. It is thus important to gauge the needs and policy directions for the micro sector separately. A section of observers thinks that in spite of implementing many policies, not much attention has been paid exclusively to the micro sector’s viability, working capital requi­rements, credit leveraging capacities, or to its market access.

How has the GST hampered micro and small units?

Before GST implementation, it was said that the new tax regime would help to lower the price level, enhance GDP, increase employment and lower inequality among producing units and states and provide a host of other advantages. But after its implementation, almost nothing (of the professed benefits) have been experienced - as of now. According to Arun Kumar, Professor Emeritus, JNU, New Delhi, it is clear that the micro and small production units have not benefited.

Any firm with turnover less than Rs. 20 lakh need not register under GST. Those with a turnover between Rs. 20 lakh to 1.5 crore are under a special dispensation called the ‘composition scheme’. They are not required to maintain detailed accounting of their business. These provisions may be helpful for many. At the same time, these units have many limitations in doing business. They cannot do inter-state business and cannot get input tax credit or provide input tax credit (ITC) to those who buy from them. ITC reduces the cascading effect of taxation. Actually, ITC implies that the tax paid at the earlier stage is deducted from the tax being paid at a later stage.

Arun Kumar in his book ‘The Ground Scorching Tax’ (2019) writes that these small units cannot pay ITC to those who purchase from them. As a result, the market for these micro and small units may reduce. It is also known that these units are employment intensive. This may in turn reduce employment and demand.