THE CONTEXT: The recent debate over an order demanding timely payments to MSMEs has once again revealed gaps in knowledge about their structure and everyday functioning. A government order, clearly in the interest of MSMEs, has led to unforeseen repercussions, marginalizing smaller enterprises in the short term. In this context, the importance of systematically understanding enterprises within the MSME ambit cannot be overemphasized.
ISSUES:
- Revised Definition and Its Impact: The 2020 revision of the definition of micro-enterprises, which increased the turnover limit to Rs 5 crore, was intended to prevent firms from underreporting revenues to retain benefits. However, this change has led to a significant skew in micro-enterprise distribution, with a vast majority reporting much lower revenues.
- Disparity in Revenue Distribution: Data from various surveys (NSSO, ASI, GST) indicate that many micro-enterprises report annual revenues below the Rs 5 crore threshold. Specifically, many of these enterprises have revenues under Rs 50 lakh, highlighting a disparity within the micro-enterprise category.
- Lack of Systematic Data: Since 2016, systematic data on enterprises not registered under the Factories Act has been lacking. The Udyam registration data does not reveal annual revenues, making it difficult to understand these enterprises’ actual economic footprint.
- Borrowing Patterns: There is a notable difference in borrowing patterns between enterprises with revenues under Rs 50 lakh and those with revenues between Rs 50 lakh and Rs 5 crore. Enterprises in the higher revenue bracket are more likely to operate with borrowed capital, indicating different financial behaviors and needs within the micro-enterprise category.
- Formality of Employment: Employment within micro-enterprises is related to their revenue size. Smaller enterprises (with lower revenues) tend to employ more informal workers. At the same time, those at the higher end of the micro-enterprise category have a higher ratio of formal to informal workers.
- Need for Further Classification: To understand better and address the needs of micro-enterprises, a more nuanced classification within the category is needed. The current broad definition creates opacity and makes designing effective interventions tailored to their diverse realities challenging.
THE WAY FORWARD:
- Regular Revision and Granular Classification: Implement a more granular classification within the micro-enterprise category to better reflect revenue and operational scale diversity. This could involve creating sub-categories of one up to 12 lakhs, second 12 lakh to 50 lakhs, and third 50 lakhs to 5 crores. This approach would ensure that policies and support mechanisms are tailored to the specific needs of different segments within the micro-enterprise category, thereby addressing the distribution skew and providing more targeted assistance.
- Enhanced Data Collection and Transparency: Mandate regular and comprehensive data collection on MSMEs, including unregistered enterprises, through surveys and integration with GST and Udyam registration data. This data should be publicly accessible and updated annually. Accurate and up-to-date data would provide a clearer picture of the MSME landscape, enabling policymakers to design more effective interventions and support mechanisms. It would also help monitor policy impacts and make necessary adjustments.
- Tailored Financial Support and Credit Access: Develop specific financial products and schemes for micro-enterprise sub-categories. This could include lower interest rates, extended repayment periods, and collateral-free loans for smaller enterprises.
- Formalization and Worker Benefits: Introduce incentives for micro-enterprises to formalize their operations, such as tax benefits, simplified compliance procedures, and access to government schemes. Additionally, subsidies or support should be provided to formalize worker employment contracts.
- Capacity Building and Skill Development: Implement targeted capacity-building programs and skill development initiatives for micro-enterprises, focusing on financial literacy, digital skills, and business management. Partner with local NGOs and educational institutions to deliver these programs.
THE CONCLUSION:
The weakened understanding of how our economy’s largest enterprise category operates makes it challenging to design effective interventions. Reviewing the micro-enterprise category and further classifying enterprises within it is needed to reduce the opacity created by new definitions and the lack of systematic data.
UPSC PAST YEAR QUESTION:
Q. Faster economic growth requires an increased GDP share of the manufacturing sector, particularly of MSMEs. Comment on the present policies of the Government in this regard. 2023
MAINS PRACTICE QUESTION:
Q. The recent government order mandating timely payments to MSMEs has highlighted significant gaps in understanding the structure and functioning of these enterprises. Discuss the implications of the revised definition of micro-enterprises on the MSME sector, mainly focusing on the challenges faced by smaller enterprises.
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