Using turnover, rather than investment criteria, is a more pragmatic way to incentivise industry
The Centre has set in motion a long-pending reform in its policy dispensation for MSMEs (Micro Small and Medium Enterprises), by tabling the MSME Development (Amendment) Bill 2018 in Parliament this week. The Bill’s most significant provision is the proposed change in the decade-old official definition of an MSME. As per the current definition, manufacturing units are defined as micro, small or medium enterprises depending on whether their investments in plant and machinery were below ?25 lakh, ?25 lakh to ?5 crore or ?5 crore to ?10 crore. The thresholds were lower for services units. But the new Bill proposes a uniform MSME definition based on more realistic turnover criteria. Now, units will be ‘micro’ enterprises if their annual sales turnover is less than ?5 crore, ‘small’ if they fall in the ?5-75 crore range and ‘medium’ if they are in the ?75-250 crore band. This change in the outmoded MSME definition has much to commend it.
For starters, the new definition will result in fairer comparisons between older and newer ventures in a sector for utilising MSME sops. Given steady escalation in project costs, comparing investments in plant and machinery over time illogically puts newer units at a disadvantage over older ones, actively militating against modernisation efforts in industry. Two, annual turnover criteria can be directly verified from the GST Network, thus putting an end to physical inspections, and the Inspector Raj necessitated by the investment-based regime. Three, turnover-based sops may be friendlier to technology-intensive sectors such as engineering, auto components or pharmaceuticals where substantial capital investments are needed to ensure even minimal scale. Hopefully, the rebooted definition will allow more MSMEs to benefit from recent policy incentives. Turnover criteria will also allow a unit to graduate from its MSME status on reaching a fair size and discourage the proliferation of inefficient units created mainly with an eye to tax sops.
Some industry bodies have expressed the concern that under the new dispensation, medium enterprises with ?250 crore turnover may crowd out smaller peers in cornering the sops. But a higher turnover limit is welcome because one of the primary problems plaguing Indian industry is the mushrooming of tiny units that stand little chance against competition. The latest NSSO survey of 6.34 crore unincorporated ventures in India noted that 84 per cent of these were own-account enterprises which didn’t employ even one worker. For the Make in India initiative to take wing, and for Indian firms to stand a fighting chance in the export market, the policy regime for MSMEs needs to actively push them to scale up over time, rather than shower them with sops to remain small-scale. In fact, the Centre should mull a sunset clause on MSME benefits to encourage these units to climb up the value chain.