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MSEs: Agenda for New Government

What the MSMEs and Small Businesses need is not any additional inducement or a new ecosystem but a business-friendly environment and making functional the existing support framework.


By V. N Prasad


Elections mean promises to woo voters, including players of the economic system. Both  the Indian national Congress (Congress) and the Bharatiya  Janta Party (BJP) specifically focused on micro, small and medium (MSME) sector in the 2019 general election to reinvigorate the economy, particularly the employment generation. Put together these (INC and BJP’s) ‘pledges’ sounded like mini Magna Carta for MSMEs.

What the sector need is not any additional inducement and/or creating a new ecosystem but establishing a business-friendly environment and activating the existing support framework. This can do wonders.

In this, the first two components (micro and small –MS) ought to have an overriding priority in view of their special characteristics.

The Complex Sector

What we have today as MSEs is not something that has grown on its own like a weed but was a result of deliberate policy initiatives and support programmes in the form concessions and the institutional network, spread over 60 years. Literally, it was an exercise of building from scratch.

According to National Sample Survey organisation’s (NSSO) Survey on unincorporated non-agricultural enterprises (2015-16), nearly 64 million MSEs (primarily unorganized enterprises) provide employment to over 100 million persons – second largest employer next to the agriculture sector. They have had a share of 28 percent in GDP, 33 percent in gross value output. A lot of these enterprises operate as unregistered enterprises, loosing on benefits that are available. A few of the enterprises are ‘leisure ventures’ and some, ’stop-gap’ ones. It is very common to hear from an unemployed youth saying “I am planning to start a business”. Such entities are the first causality of any adverse environment/development

With small enterprises accounting for about 95 percent of the total enterprise population, and that too operating without any hired hand (s), the sector is an effective tool to address the twin problems of unemployment and poverty.

One can find an MSE in every economic activity – manufacturing, trading, distribution, international trade and provision of varied kinds of services. The trading segment of the sector consist of a very large number of petty shops, catering to purely neighborhood customers.   Similarly, there are very tiny manufacturers who make a few pieces against an order or on their own for sale, because they have no other skill. The sector, thus, has become multifaceted one; each segment having its own requirement, different from the other.

Poll pledges

It is quite natural that such a large ‘vote-bank’ gets attention of political parties during the elections, particularly if it has had come under stress owing to some earlier policy decisions viz. demonetization of 500 and 1000 rupee currency notes in November 2016 and introduction of GST (Goods and Services Tax) in July 2017. The digitilisation payment was another instrument. Though the negative impact of these may be transient, due to enterprises being not ready for these, the fact is that these have shaken them.  The retail trade primarily operates on ‘cash terms’. The ‘promises’ made by Congress and BJP do indicate that all is not well with the sector. But, unfortunately, they address the issue in a segmented way.  While Congress focused on the sector as part of shoring up the employment generation, the BJP’s thrust was on small traders, perceived to have been badly affected by above-noted decisions.

The Congress manifesto talked about establishing an enterprise promotion agency, a new definition, reducing regulatory and its compliance burden, boost up the manufacturing activity, etc. The BJP, on the other hand, appears to placate/reactivate the trading community, ensure accessibility to modern technology and encourage new entrepreneurs and women employment in MSEs.

MSEs cannot be viewed solely as employment generator (Modi Government cited loans under Mudra scheme as an indication of employment creation); it has to be seen as an important contributor to GDP and the nation building.

Fundamental Issues

Conceptually, there is confusion about what constitute MSEs. The earlier referred NSS data talks about only unincorporated enterprises and excludes those that are registered under sections 2m (i) and 2m (ii) of Factories Act 1948 (relates to the worker and use of power).

The Ministry of MSME, on the other hand, includes small organised sector enterprises and those registered (Udyog Aadhaar -UA) with government agencies or not. Besides, the Coir Board, Khadi and Village Commission also monitor and organises programmes for enterprises in their respective areas. The scope, coverage and classification (of enterprises) data also vary in each case.   Only enterprises with UA are eligible for benefits that are extended by the Ministry of MSME. Concerns of all categories of enterprises need to be addressed for a holistic growth of the entire sector and encourage the promising ones.

The criterion for defining an enterprise as MSE by Ministry of MSME has traditionally been the level of investment on plant and machinery, while internationally they are classified by turnover, employment and/or fixed assets. Basing classification on investment alone results in verification cost and also comparison problems. The Government of India proposed replacing current yardstick by turnover through an amendment bill (to MSME Development Act) 2018.

NSSO, on the other hand, classifies enterprises on employment basis and has grouped them into three: Own-account enterprises (without hired labor), Non-directory enterprise with no more than five employees, and Directory enterprise with six or more hired workers.

For compatibility with internationally used classification, India’s measure could be based on any two or all the three parameters of employment, turnover, and value of assets.  Besides, more than one parameter provides a built-in check for minimisng the scope for misuse   The Congress party proposed to revise the norm to employment only.

Focused attention on each segment of the sector, viz manufacturing, services, and trading, is what it deserves. A clear distinction in approach has to be made between an income-generating (poverty-alleviating) and commercial enterprise so that each sub-segment can get its due attention and survive simultaneously. The policy should be such that it not only encourages an enterprise to build its capabilities (not be a dependent on largesse) but also enables it to move upward in the ladder. It also has to have checks to weed out the non-serious players to save on the cost involved in benefits extended to MSEs. Furthermore, simplification of operational regulations should be on the agenda so that they have a fair level-playing field.

 Energising the large network of Institutions that is already available in the Country, instead of establishing a new one as promised by the Congress, could provide much-needed support to MSEs, but presently most of them are wanting.  Besides nearly100 organisations of the Union Government, the States have their own set of machinery. Every district in a State has a District Industries Centre (DIC) to look after MSEs.

What is called for is only revamping the entire institutional framework so that it could become an effective medium for improving the competitiveness of the sector.  DICs can be converted into Small Enterprise Promotion Agencies (SEPA) – acting as a two-way road reaching benefits and services to the business entities and their concerns to the authorities. The institutional network should be such that each becomes a ‘one-stop shop’ for meeting specific requirements (technology, skill development, finance marketing, guidance, information, rescheduling operations to new developments, etc) of small enterprise.   The Public–private partnership approach in this exercise can be thought of to make these as business development services provider.

To sum up, a hassle-free environment, with a built-in corrective mechanism, to operate, and a segment-specific approach, can not only uplift MSE sector but could also encourage potential entrepreneurs to translate their business ideas into a successful venture. As MSEs constitute 95 percent of enterprises, they deserve the best of the attention from authorities.  I believe that building MSEs is building a nation.

( V. N Prasad)


Mr. V. N Prasad is an economist and SME expert. He has vast experience working on projects related to micro, small and medium enterprises.  He is the Principal Advisor Institute for Enterprise Research & Development(IERD), Editorial Advisor, GSME News.  Formerly Senior Economic Advisor, World Association for SMEs. He can be reached at vnpj@yahoo.com


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