New MSME definition may deprive smaller players of benefits

KEY HIGHLIGHTS

• CCEA revised the proposed definition of medium enterprises to Rs 50 crore as investment and Rs 250 crore as annual turnover
• MSME Minister Nitin Gadkari informed that export turnover will be excluded from the definition
• Change in definition for medium enterprises evokes mixed reaction from industry, trade bodies
• Experts fear more firms in the MSME category could crowd out real small-scale manufacturers, lower their chances of availing concessional loans
• Micro, small enterprises get incentives like lower interest rate on bank loans for purchase of plant and machinery, collateral-free loan, and government guarantee

The decision to revise the definition of micro, small and medium enterprises (MSMEs) and set higher turnover limit for grouping them has evoked mixed reaction from industry and trade bodies.

Industry body Federation of Indian Micro and Small and Medium Enterprises (FISME) welcomed the move. In contrast, some sector experts expressed apprehensions that inclusion of more firms in the MSME category could crowd out the real small-scale manufacturers and dim their chances of availing concessional loans and benefits under various government schemes.

"FISME welcomes upward revision in definition of medium enterprises as MSME," FISME Secretary General Anil Bhardwaj said.

He added that the industry body had earlier proposed to raise the turnover limit for medium enterprises to Rs 250 crore. Further, the move would help sectors such as gems and jewellery, cables and conductors among others where turnover is largely made up of cost of raw material.

ALSO READ: Cabinet approves Rs 50,000 cr equity infusion for MSMEs; minimum support price for 14 kharif crops increased

The Cabinet Committee on Economic Affairs (CCEA), chaired by Prime Minister Narendra Modi, on Monday approved the revised definition for MSMEs.

Announcing the third tranche of fiscal stimulus package, Finance Minister Nirmala Sitharaman had on May 13 announced to scrap the distinction of manufacturing and services for classifying a firm as MSME. She had proposed to label a firm as micro in case it has a capital investment of up to Rs 1 crore and turnover of less than Rs 5 crore, while enterprises with investment up to Rs 10 crore and turnover up to 50 crore will be termed a small one. Sitharaman had proposed to tag medium enterprises as the one which has an investment of up to Rs 20 crore and turnover of less than Rs 100 crore.

The CCEA kept the definition of micro and small enterprises unchanged as proposed a fortnight back, but raised both investment and turnover limits for medium enterprises. Accordingly, firms with Rs 50 crore of investment in plant and machinery and Rs 250 crore of turnover would be tagged as medium enterprise.

Announcing the decision, Union MSME Minister Nitin Gadkari said that many industry associations and stakeholders had given their suggestions on definition of medium enterprises and government had considered them.

Briefing the media on CCEA decisions on MSMEs, Gadkari said that export turnover will be excluded from the definition.

But all are not satisfied with the revised definition. RSS-affiliate Swadeshi Jagran Manch (SJM) wants medium enterprises to be kept separate from micro and small enterprises. Besides, it is of the opinion that service industry also should not be part of the small scale industry.

"Inclusion of all kinds of firms into SME sector would crowd out the real small-scale manufacturers. Most benefits would be taken away by the bigger firms," said Ashwini Mahajan, co-convenor of SJM.

ALSO READ: MSME 100% credit guarantee: Banks see red flags in fineprint

SME Chamber of India President Chandrakant Salunkhe backed the increased turnover criteria but said that there should be separate schemes and incentives for the three different kinds of firms as their requirements are different.

A Partner with a large consultancy firms said that the idea (behind raising the turnover limit) is to extend benefits to more and more companies but this may benefit big firms more at the cost of smaller firms.

"The point is banks would always prefer to give loans to a firm with higher sales as in case of default the chances of recovery would be higher. Banks would always lend to a company which has large cash flow. So, if more companies with high turnover get MSME status as per new definition, the true MSMEs may lose out," he said.

VK Aggarwal, Managing Director of Shashi Cables, a Lucknow-based medium enterprise, however, said that many small firms as per current definition would be classified as medium and as a result lose many benefits, significant among them being priority sector lending and facilitation in getting delayed payments from buyers.

Registered micro and small enterprises get a slew of incentives such as lower interest rate on bank loans for purchase of plant and machinery, collateral-free loan and government guarantee, and credit-linked capital subsidy for technology upgradation. They also get preference in public procurement with 25 per cent of the purchases by the government are reserved for the micro and small players.

"We see no issue in the new definition and increase in turnover limit for medium enterprises. Schemes and benefits are anyways few and far between for medium enterprises," said SK Jain, Managing Director of Haryana-based Solo group engaged in auto-components manufacturing.

ALSO READ: RSS affiliates demand reserving MSME tag for Indian enterprises