It's high the government revises the definition of an MSME

Harini Subramani

How many times have you, as a small business owner, had to consult the law to verify your definition as a micro, small or medium business? The importance of such a classification is a no-brainer. It helps the enterprise in monetary terms and with incentives including tax breaks till it reaches a certain size, where it doesn't need to be hand-held.

But it doesn't seem likely that the definition will be revised any time soon. The Union Commerce & Industry Ministry mentioned the possibility of a revision about a year ago and, according to Industry Minister Minister Anand Sharma, the government is waiting for foreign retail firms to set up base in India before the government revises the classification. Clearly, the Ministry does not understand the domestic market!

Not only that, the current classification is wholly inadequate. Believe it or not, according to the MSME Development Act, 2006, an enterprise is defined on the basis of one single parameter – investment in plant & machinery for businesses in the manufacturing sector and investment in equipment in the services sector.

What Is An MSME?

Under the law, following are the parameters that define the size of a business:

* Micro enterprise: Rs 25 lakh or less in plant & machinery / Rs 10 lakh in equipment
* Small enterprise: Rs 25 lakh to Rs 5 crore in plant and machinery / Rs 10 lakh to Rs 2 crore in equipment
* Medium enterprise: Rs 5-10 crore in plant & machinery / Rs 2-5 crore in equipment

Any enterprise with investments beyond these limits is not legally classified as an MSME.

SMEs Are Engines of Growth

Before we put Indian law into a global perspective, let us consider the importance of MSMEs to the economy. In India, as well as globally, the MSME sector is described as the engine of economic growth. In India, in the industrial sector, these businesses account for 80 per cent of the number of enterprises and employ more than 6 crore people. According to statistics, MSMEs are four times more labour-intensive than larger enterprises.

Even so, there have been no revisions to the definition of an MSME since the Act was instituted – in 2006!

Our lawmakers seem rather nonchalant towards this sector, leaving even simple questions unanswered. For instance, would the classification of an enterprise change if, say, its investments crossed the limit even though there was no change in output? Would it then go from being a small enterprise to a medium enterprise?

Here's another sticky predicament: The definition of an MSME does not leave any room to adjust for inflation on these businesses, nor the need to upgrade technology, all of which require large sums of investment.

How The West Classifies 'MSME'

To illustrate just how inadequate our MSME classification is, let us look at corresponding classifications the world over. Across Western countries, some of the key indicators are capital invested, number of workmen or employees, turnover of the enterprise and type of industry.

The European Union, for example, uses three parameters: employee strength, enterprise turnover and size of the balance sheet. Thus, a micro enterprise must have less than 10 employees, or a turnover of a maximum 2 million euros. A small enterprise must have less than 50 employees or a turnover or balance sheet of less than or equal to 10 million euros.

A medium-size enterprise must have not more than 250 employees or a turnover of not more than 50 million euros. Alternatively, an enterprise with a maximum 43 million euros is also medium-sized.

The US presents an altogether different picture, where the definition is based mainly on the sector. In a manufacturing set-up, an MSME would be classified very differently than an MSME in, say, the agricultural sector. Broadly, the metrics used in the US are number of employees and revenue. The figures vary according to the sector. So, for a manufacturing but non-exporting firm, the revenue requirement could be extremely significant from the value of an export / agricultural enterprise.

Focus On The Future

Can we say that Western countries have been successful at defining SMEs? Globally, there have been discussions, from time to time, necessitating constant modifications to the classification. In the EU, any of three parameters are indicators to classify an SME. Hence, it is not rigid and sectors obviously play a large role.

Back in India, experts point out that not everyone will be happy with an expanded definition of an MSME. If the investment parameter is indeed raised, enterprises that fall just outside the MSME bracket would be pulled into this ambit, thus increasing competition among medium enterprises.

However, others argue that the vast majority of MSMEs are micro and small businesses, and that medium-size enterprises should be prepared to swallow a bitter pill. Entrepreneurship has tremendous scope to succeed in India and it is critical to be flexible in terms of the number of parameters that define an MSME. The European approach seems an ideal model, if the benchmark values can be adjusted to the Indian rupee measured with inflation.

The MSME sector is still evolving and, in years to come, it will play an even bigger role in driving the economy. If the government cannot foresee this, it is time someone brought it to the notice of the powers that be and urged them to revise its current classification.

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