Micro, Small, and Medium Enterprises (MSMEs) in India

Source-This post on Micro, Small, and Medium Enterprises (MSMEs) in India has been created based on the article “MSMEs have not been defined well — and micro enterprises pay the price for this” published in “The Indian Express” on 20 May 2024.

UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context– The recent dispute over an order mandating timely payments to MSMEs. has highlighted gaps in understanding regarding the structure and everyday operations of these enterprises. Although intended to benefit MSMEs, the government order has unexpectedly marginalized smaller enterprises, especially in the short term. MSME in India

How was the definition of micro-enterprises changed in 2020?

In 2020, the definition of micro-enterprises was altered to include all entities with an annual turnover of less than Rs 5 crore, raised from the previous limit of Rs 50 lakh.

Objective-It is aimed to discourage firms from underreporting revenues to retain benefits and incentives provided to micro-enterprises by the state.

Read more- Delays in payment of MSMEs

What is the significant skew in distribution?

1) Based on revenue-

A) According to the National Sample Survey Organisation’s (NSSO) 2016 data, 95% of surveyed enterprises reported revenues under Rs. 50 lakh per annum, with 89% reporting under Rs. 12 lakhs.

B) In the Annual Survey of Industries (ASI), more than 66% of enterprises reported annual revenue below Rs. 50 lakhs, and 45% reported under Rs. 12 lakhs.

C) In the “micro” category, businesses reporting annual revenue of Rs. 50 lakh or less (Category 1) are much more numerous than those reporting between Rs. 50 lakh and Rs. 5 crore (Category 2).

D) The 2022 GST data supports this skewness, showing that around 63% of firms fall under the category of under Rs. 50 lakhs, and 30% of all micro enterprises have annual revenue below Rs. 10 lakhs.

2) Based on borrowing-

A) In 2016, based on NSSO’s 73rd round, fewer than 20% of businesses in Category 1 borrowed capital, whereas twice as many businesses in Category 2 operated with borrowed capital.

B) The median borrowings of enterprises in Category 1 were about Rs. 0.57 crore, while in Category 2, it was about Rs. 8 crores.

3) Implications of this– Limited understanding of how the largest category of businesses operates makes it difficult to devise effective solutions.

Way forward– There is a need to review and classify micro-enterprises further to address the confusion caused by new definitions and the absence of organized data.

Question for practice

How was the definition of micro-enterprises changed in 2020?