MSME

Service Enterprises

Note: These turnover brackets do not include the turnover from exports for these enterprises. To ease the business operations, the government has decided to exclude.

Studies state that there are approximately 2.2 million micro-enterprises, 0.29 million small, and ~ 10,981 medium enterprises in India. The Y-o-Y growth of MSMEs in the country is 18.5%. Uttar Pradesh has the largest share of MSMEs in the country, followed by West Bengal with 14.2% and 14%, respectively. Maharashtra and Tamil Nadu each contribute to 8% of the total MSMEs.

There are four statutory bodies in the MSME ministry:

1. Khadi and Village Industries Commission (KVIC)

2. National Small Industries Corporation Limited (NSIC)

3. National Institute for Micro, Small and Medium Enterprises (NI-MSME)

4. Mahatma Gandhi Institute for Rural Industrialization (MGIRI)

The KVC is responsible for strengthening and developing the rural economy by promoting khadi and other village industries. Generation of employment opportunities for the rural population is one of the key focus areas of this body. NSIC promotes, aids, and fosters the growth of micro and small enterprises (the commercial aspect of these businesses). NI-MSME is more focused on budding entrepreneurs, formulation of policies, and promoting enterprises. Lastly, MGIRI promotes and encourages rural and village economies and strives to empower rural populations by introducing innovation and technology.

Government Policies for MSMEs

The Indian government acknowledges the role of MSMEs in the economy and developed policies to encourage these businesses and help them grow.

• INR 3 lakh crore ($41Bn) collateral-free loans for MSMEs as a COVID-19 relief was announced by the finance minister.

• Announced Guarantee Emergency Credit Line (GECL) of INR 10,000 crores for eligible MSMEs in the Union Budget 2021 to accelerate and boost the sector

• The government allotted INR 7,572 crores for MSMEs in FY20, whereas in FY21, it doubled the budget to approximately INR 15,700 crores. This is an excellent step toward promoting Atmanirbhar Bharat.

MSME Registration: How to Register and Benefits of MSME Registration

From July 1, 2020, it is mandatory to obtain “Udyam” registration for all the existing MSMEs in the country and new MSMEs. It is a simple registration that can be done online by self. Aadhaar number is the mandatory certification required to obtain the MSME Udyam registration online.

In the case of a proprietorship company, the Aadhaar number would be of the proprietor (individual). For a partnership organization, the managing partner’s Aadhaar is needed. For a Hindu Undivided Family (HUF), Karta’s Aadhaar number must be entered into the system. In the case of a Limited Liability Partnership (LLP) or a trust/cooperative society, the authorized signatory’s Aadhaar has to be provided.

Once you complete the online MSME registration process, the company (MSME Unit) will be provided with a “Udyam Registration Certificate.” There is no expiry for this certificate. Till the time the business follows ethical practices and is financially viable, the certificate is valid. There are multiple benefits to having an MSME registration online. If there are multiple units or plants, or entities, the certificate is needed only for the parent entity where the details will be mentioned. Post-registration, the minimum alternate tax can be carried forward 15 years (initially it was 10 years), and it is easier to get government tenders. The government has the authority to deregister the company in case of any violations, namely, if the investment is more than the limit mentioned under the MSME act or manufactures any products requiring other licenses (industrial or any statutory license).

Government Policies Benefits

The pandemic and the country-wide lockdown impacted economic growth and has put severe financial stress on businesses, especially micro and small businesses. Considering this, the finance minister announced the Atmanirbhar Bharat Abhiyan program. Moreover, an economic package with new initiatives and policies was introduced to help businesses navigate and channelize capital better. The government has announced various subsidy programs and schemes to make the market more competitive and help them grow.

• The 45-day Cycle of Invoices

In micro and small businesses, the credit cycles are ad hoc, and businesses usually run tight on capital and have low liquidity. This was addressed under the MSMED Act of 2016. The buyers are liable to pay the seller (clear their invoices) within 45 days from the invoice date. In case of delays, the buyer is liable to pay interest on the invoice amount (monthly interest rate = 3 times the bank rate defined by the Reserve Bank of India).

• Mandated 25% Sale to Certain Departments

To promote MSMEs and enhance their businesses, the government mandated that certain departments and public sector companies purchase 25% of their product requirements from MSMEs.

• Emergency Credit

One of the critical concerns of MSMEs has been the easy access to credit. The government, to address this, has launched an emergency credit line for MSMEs where up to INR 3 trillion can be sanctioned. In this scheme, banks and financial institutions will be able to provide funds without any additional collateral/guarantees. The government guarantees 20% of the outstanding amount of the loan as of February 28, 2020.

• Debt Schemes

Businesses are usually capital intensive, and raising funds is as important as running the business itself. To finance via equity funding is tricky, and the COVID-19 pandemic has just made it worse. The majority of the promoters are facing difficulty in raising funds. To assist the businesses, the government launched the subordinate debt scheme that helps the businesses by providing capital via debt. The promoter can avail INR 75 lakhs or 15% of his/her contribution, whichever is lower.

In books, this is similar to the government chipping in equity while the banks do not take any additional risk in providing the funds guaranteed by the government. The company records these funds as equity and, in turn, maintains liquidity and maintains its debt/equity ratio.

• Speedy clearance of payments

Government identifies the importance of liquidity in businesses, especially in the case of MSMEs. In acknowledging this, the government has mandated a 45-day limit for public sector units and government departments to clear their dues for purchases made from MSMEs.

• Supporting growth

The government launched a new portal (Champions Portal) for the MSMEs to help them with the entire supply chain from procurement of raw materials to sales. The portal encourages the MSMEs to take over new opportunities with the changing needs of the economy, such as setting up pharma manufacturing units to address the current demand.

• Funds of Fund scheme

Among all the different schemes the government launched for MSMEs, the funds of fund scheme is to provide funding and financial support to companies that showcase immense growth potential and economic and business viability. This scheme was launched with an INR 10,000 crore corpus and has a split of mother funds and daughter funds. Initially, the fund will be managed by the mother fund, and it helps raise a further corpus (~INR 50,000 crores) of daughter funds.

• Credit-linked Capital Subsidy

For any business that seeks to upgrade its technology or other assets to increase the productivity and efficiency of its business, this capital subsidy scheme comes in handy. A subsidy is given to these businesses by the banks under this scheme on the induction of well-established and improved technology.

• Promoting Domestic Production

With the pandemic shaking the entire country, the Government of India promoted the Atmanirbhar Bharat campaign, which promotes domestic manufacturing and production. Along the same lines, the government took a bold step toward amending the financial rules and disallowing global players to submit tenders in government procurement of goods (up to INR 200 crores).

Other Benegits Of Government Policies for MSMEs

• Collateral-free loans

• ISO certification charge—reimbursement

• Delayed payments protection

• MSMEs are eligible under the industrial promotion subsidy program

• Discount on utility bills

• Exemption of 1% on the overdraft interest rate

• Subsidy of 50% on registering a patent

Although there are numerous benefits, schemes, policies in favor of these businesses, they still face a significant number of challenges that are the roadblocks affecting their growth, namely, lack of innovation and adoption of new technological tools, low capacity of production, inadequate facilities (infra, power, roads, water), inefficient supply chain processes, lack of visibility, inadequate manpower (skilled and unskilled), limited financing options, high cost of credit, and limited access to global markets. The government and the startup ecosystem are constantly evaluating these challenges and providing businesses with various incentives to overcome these challenges.

Opportunities for MSMEs in India

The government owns and runs an e-commerce website called Government e-Marketplace (GeM), wherein MSMEs can market and sell their products. The various ministries and the public sector companies source their goods from this platform. As of September 2020, the platform has witnessed transactions worth $7.5 billion (INR 55,000 Crores).

The government provides immense opportunities for entrepreneurs who set up enterprises and contribute to the economy and employment of the country. MSMEs are extensively supported and promoted.

Wrapping Up

The Government of India is working with the World Bank to facilitate and ease the accessibility of credit to MSMEs. They collectively focus on various policies, fintech platforms, initiatives, systems to channelize and operationalize this. With its consistent focus on MSMEs and domestic production, the economy will witness exponential growth with MSMEs driving as a core engine.

The government aims to double the Indian economy to a $5 trillion market by 2025, and MSMEs are one of the key contributing factors. More investments in R&D, subsidy schemes, access to new-age technologies and product innovations, subsidization of global resources, and skill development are some of the initiatives the government envisions to provide to MSMEs to help them accelerate their growth.

The role of MSMEs in the Indian economy is pivotal and significant and will continue to be so. With the right initiatives, policies, and technology, this sector will demonstrate immense growth and contribute significantly to the country’s economy.

MSME Frequently Asked Questions

What is MSME?

MSMEs are an important sector for the Indian economy introduced by the Indian government. These MSME or Micro, Small, and Medium Enterprises primarily engaged in the production, manufacturing, processing, or preservation of goods & commodities.

What is the full form of MSME?

The full form of MSME is Micro, Small, and Medium Enterprises. MSME industries are the backbone of the economy in a developing country like India.