Explained : Govt reinstates retailers, wholesalers as MSMEs, what benefits will they get, what are the concerns

Moneycontrol explains what is the present definition of MSMEs, when was  wholesale and retail trade removed as MSMEs, what benefits will the trades get now and what are some of the concerns raised by the industry associations.

What is the existing definition of MSMEs ? When were retail and wholesale trade excluded as MSMEs?

As per the existing definition of MSMEs, enterprises in the manufacturing and service categories are considered to be MSMEs. The government in June 2017 removed retail and wholesale traders from the MSME category.

In 2017, a gazette notification was issued by the government which declared that small retailers and wholesalers would no longer be deemed to be a part of the MSME category.

The Micro, Small and Medium Enterprises Development (MSMED) Act, which was notified in 2006, had defined an enterprise for the purposes of small businesses in terms of “manufacturing and service entities”.

While retail and wholesale businesses were included under the definition of MSMEs under the 2006 Act, the Centre removed them from the list in 2017 saying that they were neither involved in manufacturing and nor were they service units.

What benefits will the retail and wholesale traders get as MSMEs?

The government time and again has announced various schemes for the MSMEs in order to help them get access to funds and tide over the impact of the covid19 pandemic. The wholesale and retail traders will therefore now be eligible to avail those schemes and gain from the benefits attached to them.

Another key benefit which the traders can now avail is that of priority sector lending (PSL). Loans given to the MSME sector come under priority sector lending. But the non-inclusion of retail and wholesale traders as MSMEs had denied them of this benefit.

Apart from agriculture, the loans given to MSME sector also come under the ambit of PSL and as per the RBI's guidelines, commercial banks should extend 40 percent of the total lending towards the priority sector while for the regional rural banks and small finance banks, the PSL target has been set at 75 percent of the total lending.

Also another benefit which the traders can reap is of the Udyam registration portal. The Udyam portal is a free, paperless online and instant registration portal.

MSMEs which self certify their existence by registering on the government portal are eligible for a wide variety of benefits ranging from interest rate subsidy on bank loans, to exemption under direct tax laws, concession in electricity bills among others.

How many wholesale and retail traders are expected to benefit from this and how many MSMEs are there currently ?

About 2.5 crore wholesale and retail trades are expected to benefitted from the government's decision to reinstate them as MSMEs. It must be noted that there are an estimated 6.3 crore MSMEs that exist as per the National Sample Survey 73rd Round (2015-2016).

Uttar Pradesh is said to have the highest number of MSMEs at 90 lakh enterprises followed by West Bengal at 88.7 lakh enterprises.

The Micro, Small and Medium Enterprises sector in India is said to be the second-largest employment creator after agriculture, providing employment to an estimated 11 crore people. It contributes 30 percent of the GDP and accounts for 48 percent of the exports.

What are some of the concerns raised by the industry ?

While the government's decision has been hailed by the industry as it will provide benefits to the traders, there is however a flipside to it too.

According to K E Raghunathan, Convenor, Consortium of Indian Associations, although the government's intention is commendable, the move is disastrous as the inclusion of 2.5 crore traders as MSMEs would dilute the sector which is already vast and is struggling for survival.

“There is already is no data to classify the MSMEs as manufacturers, service providers, exporters, ancillaries, among other categories. By including a vast number of traders, it would further complicate it and make it difficult to assess and monitor those involved in various sectors and prepare targeted schemes both for employers and employees” . The issues and challenges are largely different between Traders and Manufacturers , though both need each other, noted Raghunathan.

“Very recently, the government increased the corpus of the ECLGS scheme to Rs. 4.5 lakh crore, but by adding such a large number of traders who will also become eligible for it,a manufacturing unit which is more in need of funds will have its share of the benefit taken away. It is like inviting 25 people for dinner when you have food only for 5," he added.

According to Raghunathan, “The existing support to MSMEs through Government e Marketplace, payment outstanding redressal by state facilitation centers and the quantum of priority sector lending will also weaken.

“By including traders as MSMEs, India instead of becoming Make in India would become Label in India. However, the need of the Traders are equally necessary to address and we could create a separate window for them and administer easy solutions to them. Already we have 6 cr Micro enterprises in India , with most of the Traders falling under Micro, it will jump to over 10 cr and then become unmanageable, "Raghunathan concluded.

A senior functionary of MSME industry body, who did not wish to be named said, "While the government's intension to help the traders is commendable but their inclusion as MSMEs will weaken the sector. By including the wholesale and retail traders as MSMEs, they will become eligible for a lot of schemes which are presently for MSMEs so a more needful manufacturing entity will not be able to avail the benefit as it will already be availed by the traders wo do not need that much of funds and investments as a manufacturing unit. "

Moreover, they will now become eligible under priority sector lending which will make the banks prefer a trader over the manufacturer as they re less risky in business which would impact the overall sector, he added.