On February 1, India’s Finance Minister announced an attractive package for the Micro, Small, and Medium Enterprises sector. With a provision of INR 15,700 crores, the MSME budget has doubled as compared to 2020-21, reflecting the government’s focus on economic recovery through the pandemic. Efforts for greater credit provisioning are evident: with the Prime Minister Employment Generation Programme (PMEGP) and the Guaranteed Emergency Credit Line (GECL) receiving nearly 80% of the outlay.
2020 has nevertheless been a challenging year for MSMEs in India. A survey by LEAD at Krea University and the Global Alliance for Mass Entrepreneurship revealed that 40% of small enterprises decided to borrow to cover their expenses and only 14% of these enterprises availed loans through formal sources. Findings from another study by LEAD, focusing on women-led enterprises, found that one in three entrepreneurs shut down their businesses between June-July 2020 – with informal enterprises being 40% more likely to face closures as compared to their registered counterparts. In a follow-up survey ( of those who reported permanent closures) conducted in November 2020, 50% were able to restart their businesses within a month, while 32% of the enterprises still took over six months to resume their operations.
This year’s budget thus raises important questions on scheme-wise allocations in the MSME outlay.
An analysis of the outlays suggests that schemes essential to stimulate immediate recovery have been prioritized over others. Allocation for infrastructure programmes focussing on capacity building and new technology centres have declined by almost 25% from last year. Not only has allocation for schemes promoting technology upgradation, quality certification and market promotion been halved, schemes for the adoption of modern technology and innovation, have also been halved. Despite there being an existing demand from owners for a wider scope and amount for the technology-upgradation subsidy, a clear reduction in their outlay perhaps signals again reprioritization even in technology, towards methods that guarantee fast recovery, over tech schemes with longer gestation periods.
The increase in outlays for PMEGP and other support credit schemes (up by 346.4%) is entirely driven by the two new entries, the distressed assets fund and the GECL (Guaranteed Emergency Credit Line). The GECL is a government scheme aimed to cushion the impact of the pandemic by providing government (NCGTC) guaranteed loans to approximately 45-lakh MSME borrowers, without any additional collateral.
Enterprise Size: Are the schemes and definitions skewed in favour of larger enterprises?
According to the 2019-2020 Annual Report of the Ministry of MSME, there are 63.4 million enterprises in India that fit the micro, small and medium enterprises (MSME) status. The distribution of enterprises is heavily skewed towards the ‘micro’ category (99.4%). While a significant portion of India’s informal enterprises falls under this category, the change in definitions introduced by the Ministry of MSME in July 2020 may further skew this distribution.
|Definition as per updated MSME guidelines
|Number of enterprises in India
|Investment <1 croreTurnover <5 crore
|Investment <10 croreTurnover <50 crore
|Investment<20 croreTurnover <100 crore
With the new definitions, the government now considers two aspects while defining an MSME: investment and turnover. What used to be the upper end in the definition of a medium enterprise—a firm with an investment of Rs 10 crore (in-plant, machinery or equipment)—is now defined as a small enterprise. This move will benefit about 2 lakh enterprises which will move to categories of micro, small and medium enterprise, with all MSMEs receiving the following benefits from the government:
- Compulsory government procurement —which includes ministries, departments and public sector undertakings
- Prioritised lending from banks
- Subsidies for industry promotion
- Collateral free loans
- Other benefits – on electricity bills, charges on patents etc.
The infographic below should help us analyze (based on levels of entrepreneurial activity), which schemes can be expected to benefit smaller, traditional businesses versus businesses of a certain size, agency, formality, and scale. While many schemes such as Promotion and Marketing Scheme, PMEGP, GECL, Distressed Assets Fund, etc., are common to both and are intended to benefit all MSMEs, access is often restricted to larger enterprises. One can broadly think of four parameters that could incidentally create divisional access between schemes for nano/rural/traditional enterprises vs larger/formal enterprises:
- Schemes that require higher functional/digital literacy to go through application procedures
- Schemes that require registration (business and/or bank registration) or some level of formalization
- Schemes with prerequisites to access formal financial services – financial literacy, availability of collaterals, registration (bank account), etc
- Schemes that have been earmarked for rural/traditional/nano enterprises.
Based on the above classification, the below graphs illustrate outlay changes between schemes expected to benefit formal, larger enterprises versus nano, informal enterprises. From the two graphs, it becomes clear that despite marked reductions for all outlays, there have been clear gains for larger formalized enterprises.
Formality and crowding out of nano-enterprises
The 2020 revision thus adds many more larger enterprises within the MSME category, more so in the micro subcategory. This potentially crowds out the really small enterprises i.e. the nano enterprises within the category of ‘micro’ enterprises, whilst still letting larger enterprises reap benefits from the new classification. There are no clear definitions of nano-enterprises, although they are characterised by low employee count (maximum 1-2 employees) along with lack of identification and structural issues. Therefore, it becomes even more necessary to understand the nature of the nano within the micro, which makes 99% of the MSME sector. According to the 73rd National Sample Survey, 98% of the enterprises in India are proprietary, i.e owned by a single household. Of the 63.4 million micro-enterprises, 84% are ‘own account’ enterprises (OAEs), hiring no paid employee outside the household. It might thus be safe to estimate that approximately 53.24 million enterprises in India are OAE, and most businesses in the nano sector (approximately upwards of 83%) are own-account. In terms of formality, 69% of these ‘nano-enterprises’ are mostly own-account, without registration and perhaps largely informal in nature. Economists consider most OAEs as nano enterprises, with the possibility of adding in enterprises with employee size of 1-6. Own-account enterprises are also characterised by low growth and a majority having such low working capital that they are forced to operate out of households or temporary structures.
Registration and formality can become a double-edged sword. While unregistered, informal businesses may find themselves at the risk of being crowded out from the clamour to avail government benefits, registration in itself can also prove to be an exclusionary process. According to reports, only 31% of the 63.4 million MSMEs are registered under some act or with some registration authority. Udyam, the Government of India portal authorized for MSME registration has about a crore enterprises registered – 16% of the non-construction and non-agricultural enterprises. To avail priority sector lending norms for MSME, every enterprise is required to register on the portal. However, the portal excludes wholesale and retail traders from the MSME classification and, thus, automatically from registering. According to the 73rd NSS data, 19.96 million enterprises out of a total of 63.4 million unincorporated entities were involved in trade. This significantly affects women enterprises, locking out 98.5% of them in the trading sector.
Gender and MSMEs
The disproportionate distribution of enterprises is even starker when it comes to ownership by gender. It is evident by the official statistics that women-owned enterprises are more likely to be smaller. As enterprises grow and graduate to categories of ‘small’ and ‘medium’, the proportions of women enterprises in the upper rungs decrease drastically. The problem of women and informalisation is compounded further, through access to registration.
The KVIC (Khadi and Village Industries Commission) covers about 2.48 lakh villages, being an important source of gainful employment for traditional, rural, and women MSMEs. Of the nearly 4.98 lakh people engaged in Khadi activities, over 80% are women artisans, while the Village Industries employment stands at 147.97 lakh artisans. The Coir industry (the world’s largest producer of Coir) provides employment to 7.34 lakh people, mostly from rural, economically weaker sections and women (over 80%).
Notably, the KVC outlay has seen the third-highest drop of 40% and significant reductions in the traditional schemes outlay. The cuts come at a time when the KVIC reported the sector being significantly hit during the pandemic, leaving them with a drop in production and unpaid salaries.
Several 100 crore+ schemes have seen significant reductions this year, some of which deal specifically with providing assistance to traditional rural industries and KVCs:
- Scheme for the regeneration of traditional industries or SFURTI (63.4% decline)
- Coir Vikas Yojana (63.6% decline)
- Solar Charkha Mission (95% decline)
- The Gramodyog Vikas Yojana (for the promotion and development of the village industries through common facilities, technological modernization, training, etc) has seen a 51.4% decline.
- A similar decline is observed in the Khadi Vikas Yojana which has been reduced by 120 crores from last year’s outlay, despite housing programs such as the khadi reforms development and market promotion development programs.
With the revision of MSME definitions, more enterprises are added to the widely defined, catch-all ‘micro’ category, prompting a possible crowding out of smaller enterprises. This could hinder the growth of nano enterprises requiring assistance, which according to reports have been known to have high failure rates (as high as 70-80%). Firms in India start nano, but rarely grow beyond survival and with these new defining guidelines, they face greater risks. Better agency (by virtue of formalization and/or goodwill that comes with businesses of a certain size), initiates a cycle of preferential lending by banks which shift to firms with better (and trackable) credit ratings in a bid to avoid the risk of default. This also maintains a steady pool of credit resources for larger firms that benefit from remaining in the micro category. And despite nano-enterprises being more in number, bigger enterprises are likely to be in a better position to avail the benefits of being in the micro-category such as collateral-free loans and public procurement preference.
The existence of these perverse incentives could discourage micro- enterprises to graduate into higher categories, as leaving the ‘micro’ categorisation will reduce access to schemes and incentives. Caution in incentivising growth peculiar to the nature of MSMEs is vital to prevent businesses from seeking specific incentives by either stagnating or not reporting the correct status of their enterprises. Therefore there is an immediate need for stratified incentives for transitioning enterprises within the MSME category.
Nano enterprises could benefit from being included as a separate category in the list of definitions, perhaps extending MSMEs to MSMNEs. The RBI and other banking institutions for the purpose of providing credit could also define nano firms according to their own parameters. RBI has already established some parameters with microfinance institutions (MFIs) and Small Finance Banks (SFBs) for the classification of priority sector norms. Economists suggest RBI could also peg these parameters to those of Mudra norms.
However, to tap into the benefits of the same – information dissemination will remain a crucial link in removing hurdles in registering and accessing schemes. With 99% of the businesses in the micro category of MSME, a greater parallel push for information dissemination is vital to ensure that the smallest and marginalized business owners are also aware of their rights. Additionally, schemes augmenting the capacity of supporting institutions such as SHGs (which are an important source of information, credit, and networking for small-rural entrepreneurs) are equally essential.
Despite challenges, much has already been done by the government to improve the ease of doing business and remove many bureaucratic hurdles. Some of the key promising initiatives taken to reduce bureaucratic hurdles taken include:
- A single window portal for the registration of MSMEs
- Minimizing the requirement of as many as 15 No Objection Certificates (NOCs) to set up a business.
- A recent development by the RBI, wherein existing Entrepreneurs Memorandum or Udyog Aadhaar Memorandum obtained before June 30, 2020, will remain valid till March 31, 2021.
Nevertheless, the budget of 2021-2022, is after all a Covid-19 recovery budget. There appears to be a move towards general monetary assistance to benefit all MSMEs, yet expectations remain to refocus on capital upgradation and support schemes, perhaps once recovery is underway.
About the Authors
Kartikeya Bhatotia is a Research Associate with LEAD, and is currently engaged with the Solutions for Transformative Rural Enterprises and Empowerment (STREE) initiative that provides technical assistance to the National Rural Livelihoods Mission. Kartikeya is interested in livelihoods, human ecology, and the political economy of developing countries.
Nilanjana Bargotra is a Research Associate with LEAD, engaged in a project that seeks to evaluate the impact of safety technologies on women’s labour force participation rates and skill acquisition in the NCR region. She is interested in the application of digital technologies and behavorial/experimental economics to labour market outcomes, employment behavior and digital economies.