The Indian government announced a number of reforms to help micro, small and medium enterprises that had been affected by the Covid-19 pandemic – including changes in how an MSMEs are classified. Rahul Ranjan looks at the shifting classification of enterprises between the old and new definitions and delineates which industries in the manufacturing and services sector saw gains in micro-enterprises as a result of this change. 

The micro, small and medium enterprises (MSMEs) sector is sometimes referred to be the ‘backbone of the economy’, as it employs a substantial number of people – the most after agriculture (Saxena and Jagota 2015). This sector also generates low-cost employment opportunities in rural areas, which helps to reduce the economy’s regional imbalance. MSMEs account for 33.4% of India’s manufacturing output, and provide 45% percent of the country's total exports (Economic & Political Weekly, 2020).

In 2020, the Covid-19 pandemic caused supply-side disruptions and demand shortages in every sector of the economy, including MSMEs. To help the economy and the MSME sector in particular, the Union Government announced a special package of Rs. 3 trillion in collateral-free loans, as well as, on May 13, 2020 as part of the Atmanirbhar Bharat Abhiyaan. One of the revisions was a change in the definition of MSMEs.

Changes in the definition of MSMEs

There is no one-size-fits-all definition of MSMEs that can be used globally (Gibson and Vaart 2008, Ardic et al. 2011, Berisha and Pula 2015, ILO, 2015). The Bolton Report, published in 1971, was the first to define MSMEs. According to this report, there are two techniques for defining MSMEs – quantitative and qualitative – with MSMEs typically defined using a quantitative approach. According to research conducted by the International Labour Organization (ILO), there are over 50 definitions of MSMEs in 70 countries, with significant ambiguity in terminology (Berisha and Pula 2015). The World Bank uses number of employees, total assets, and yearly revenue to define MSMEs. The number of workers is a simple criterion to use, but it has considerable limitations, since the necessary number of people depends on the type of firm (Stokes and Wilson 2010). Manufacturing, for example, requires more workers than the service sector. Workers’ requirements vary by industry as well as (Yadav and Kumar 2017). Similarly, certain industries (such as pharmaceuticals, medicinal chemicals and botanical products) demand more investment and produce fewer manufacturing outputs than others. 

In India, the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006 was the first to introduce the concept of a medium enterprise (Nair and Das 2019). MSMEs in both the industrial and service sectors were categorised under this statute in terms of investment in plants and machinery. Investment criteria are self-declarations that require physical verification and incur transaction fees. These investment-based criteria are insufficiently motivating for industries to develop. Industries kept their plants small to maintain the advantages associated with MSMEs, and displayed a reluctance to promote the industry’s expansion. 

In July 2018, the MSMED Amendment Bill, 2018 was tabled to define MSMEs solely based on their yearly turnover. Turnover criteria are more dependable than the investment criteria, as they  are non-discretionary, transparent, and do away with the necessity for physical inspections – if a firm’s revenue exceeds a certain threshold, it must register with the GST network. However, turnover standards have also been criticised as they under report qualifying. 

As a result, the Indian government introduced new, composite criteria in terms of investment and yearly turnover to identify the manufacturing and service sector as micro, small, and medium enterprises under one umbrella definition. According to the new composite criteria, an enterprise is classified as a micro-enterprise if its investment is less than Rs. 1 crore or its turnover is less than Rs. 5 crore; a small enterprise if its investment is less than Rs. 10 crore or its turnover is less than Rs. 50 crore; and a medium enterprise if its investment is less than Rs. 50 crore or its turnover is less than Rs. 250 crore (Table 1). Large enterprises are defined as any enterprise that surpasses the standards for a medium-sized enterprise, in both the old and current definitions. 

Table 1. Existing and revised definitions of MSMEs

Table 2 reports the number of enterprises as per the existing and new definitions for the manufacturing and services sectors respectively. Analysis of these figures reveals that, by introducing a new definition of MSMEs, there is more inclusion of enterprises in the micro-enterprise category, especially as registered micro-enterprises in both the manufacturing and services sectors. Due to definitional change, about 13,000 and 12,000 manufacturing and services enterprises respectively will come under the purview of MSME provisions. Approximately 8,000 enterprises will fall into the manufacturing medium enterprises category, as this change only affects registered enterprises. 

Table 2. Number of enterprises according to existing and new definitions, in thousands (‘000s) ¹

Table 3: Industries that added the largest number of MSMEs owing to the new definition