MSME – An attempt at redefinition

In recent times the discussion about redefining the MSME classification criteria has resurfaced again. The current qualifiers were infact set much before the MSME nomenclature came into vogue. Previously, MSME used to be known by the term SSI (Small Scale Industry).

With great emphasis to catalyze and acknowledge the importance of the small business sector, the government enacted the MSME act, thereby bringing an end to the SSI nomenclature. While the change brought about some modifications and improvements, many aspects of the SSI act continued in the MSME act as well. One such unchanged item is the MSME classification criteria.  The same is presented for reference in the table below based on their investment in plant and machinery:

Micro  (Manufacturing) Upto 25 lakhs Small (Manufacturing) 25 Lakhs to

5 Crore

Medium

(Manufacturing)

5 Crore to

10 Crore

Micro

(Services)

Upto 10 lakhs Small

(Services)

10 lakhs to

2 Crore

Medium

(Services)

2 Crore to

5 Crore

 

Today considering the changing economic scenario, a change in the criteria is being considered in the values. The debate today is around the proposal from the government for revising the figures of investment in plant and machinery upwards.

Number of associations voicing and lobbying for the benefit of MSME; have been discussing around right values that are to be considered for classification. Though there have been faint voices, highlighting a much needed change to the criterion itself, the topic does not seem to gather steam.

With more than 80% of the MSME in the country belonging to the Micro Group, change in values alone might cause the maximum challenges only to the medium sized members of the MSME group.  This has been one of the primary reasons, for lot of associations to be against upward revision of the values. An upward revision of values would bring more institutions into the MSME fold, thereby making the upper end of the spectrum more competitive. While this would increase the number of ventures coming under the protection of MSME Act, how it would actually improve the situation of the overall MSME cadre remains an unanswered question. However, the rationale behind changing the criterion (which is not received keen interest) from the prevailing ‘investment in plant and machinery’ to other factors used globally such as ‘Employee head count’, ‘Turn over’ is not even being entertained or discussed.

There could be many reasons for this. Could it be that if such factors are brought in – some of the medium sized members may have to move out of the group? Will there be a greater than estimated upheaval and churn in the MSME group? Will multiple factors make governing an act such as MSME more difficult?

While there are many questions that needs serious consideration, debates and thoughts, one thing that is undeniable is the importance of the MSME sector.

Though a lot gets spoken about MSME sector in India, a lot remains to be done and acted upon. Considering the evolution, importance and impact of MSMEs in the economic development of other nations – it is clear that governing and developing this sector is going to be an important yet daunting task. Public policy, professionals, planning enthusiasts, strategists, political leaders, bureaucrats and ofcourse the MSME owners need to put their heads together and look more comprehensive and holistic reforms than just recalibrating the qualifying bar..

MSME – Jai Ho!

On 28th of April 2012, AIMA organized the 3rd national MSME convention in Chennai in collaboration with Madras Management Association (MMA). Due to various reasons I had not attended a conference in sometime. The word MSME in the title attracted my attention since as an organization we provide a number of services to this sector.  As an individual my interest in research and writing also happens to have MSMEs as a critical component. Hence I decided to devout an entire day to knowing more about the MSME sector in the country.  The theme of the conference was “Building globally competitive MSMEs: The Way Forward”. Just like many of the other MMA programs this was also well organized and well conducted.

Mr.Rajiv Vastupal president AIMA,  Dr. J S Juneja Chairman task force MSME AIMA,  Dr H P Kumar Chairman and MD NSIC Ltd and  Mr. M Narendra Chairman & MD IOB kicked off the program by giving us an overview of the intent of the convention. Following the inaugural session we had four interesting panels of speakers each one addressing a specific aspect which was critical to making MSMEs globally competitive.  Mr. Subrahmanyam of IOB made a short but informative pitch from the banker’s perspective on availability of credit. His thoughts on availability of funding options were interesting.

Mr.Jayanta Chatterjee of ICRA gave an interesting view on ratings and its benefits to MSMEs. Mr.Sundara Raman of RAMCO spoke on the evolution of technology and how cloud computing is changing the way MSMEs may tap into the power of IT.  Mr Suneet Singh Tuli CEO of Datawind Ltd gave a thought provoking presentation on innovative marketing. His thoughts on promotion and sales starting from his engineering fax machines to the latest Aakash Tablet was radical and truly out of the box.

Mr.Siva Kumar of Prabha Engineers spoke with immense confidence on his close to three decade success of starting and growing an enterprise. After Mr. Singh’s explosive talks I was wondering how the next speaker would capture the attention of the delegates, but Mr. Siva Kumar’s thoughts on people management simply blew the lid away. His examples on people management proved beyond doubt that little things done with concern can go a long way in knitting together a committed team, and solve the attrition problem.

A few success stories were also shared in the convention. The story of Mr. N K Chaudhary of Jaipur Rugs was extremely heart warming.  His passion and genuineness could be both felt and heard.  Mr. Suresh Srinivasan of Organic India, gave a quick peek into the organization’s purpose and products.  Mr. P K Gupta of Cafe Buddy’s shared his start-up story and his initial experiences with creating low cost cafes.  It was interesting and surprising to hear a talk on cost competitiveness from a banker. Mr. Sridharan of SIDBI gave interesting anecdotes which I am sure excited and gave insights to  a number of us in the audience on how cost effectiveness can be achieved.  Mr. Arumugam of NSIC provided useful information regarding the public procurement policy of the government.  Dr. Juneja  summed up the key takeaways at the end of the program

Some of the key statistics that I found very interesting about MSMEs are as listed below:

  1. MSMEs account for around 45% of manufacturing output, 95% of industrial units, and 40% of exports
  2. They Provide close to employment to 60 million people
  3. There are close to 26 Million units of which a mere 6 million are registered.
  4. They contribute close to 8% of GDP
  5. They register close to 12% annual growth

Personally belonging to this sector and servicing this sector, it was highly encouraging that MSMEs in India are thriving even in the midst of all the challenges (social, economic and political) that are being discussed and felt across many quarters.  Though the regulatory climate in India with respect to business may not be very friendly the MSMEs prove the indomitable will of the individual entrepreneur. Though there were a number of deliberations on the policy changes required, how banks need to view credit products differently and how ecosystem support has to increase, it was also evident that MSMEs had to drastically make changes to their overall business practices, if they want to scale and grow out of the category.

I loved the conversations, speeches and question and answers. I came out of the convention pretty motivated and with some specific action points. I am sure this was one of those productive days well spent. This is one reason why I thought I would share these with you at the beginning of your week as well!

 

MSME and Budget 2012

The small businesses of a country are an extremely important but ignored lot. Primary reasons for this is the low per unit turnover, high number of individual units and more importantly highly scattered nature of their existence. These reasons have always put the small business community on a weaker footing when lobbying for support from policy makers. This is one game where the big brother phenomena always win. Akin to this, in the budget proposed last week by the finance minister, one does find only a scattered and scanty reference to the MSME community. Here is a quick glance of the proposed clauses and some thoughts on what they may mean to MSMEs of the country.

 71. In order to enhance availability of equity to MSME sector, I propose to set up a 5,000 crore India Opportunities Venture Fund with SIDBI.

In an interesting move the finance minister has attempted to address one of the critical challenges of the MSME institutions namely capital. By setting up a large fund through one of the public sector financial institution, which is widely accessible across the country there is hope that a fair portion of these funds will also be accessible without much bureaucratic bottle-neck. One of the growing subset of the economy namely the services oriented businesses, normally find it more difficult than usual to gain access to capital. Hope this fund will enable solve this major challenge. This is important in the light of an economy that is growing with a heavy dependence on services. It must be remembered that a similar scheme by the name CGTMSE – launched earlier seemed exciting, but was difficult to leverage. Hope this scheme lives its intended purpose in the spirit rather than the letter.

 72. The Small and Medium Enterprises (SMEs) are the building blocks of our economy. They rely primarily on loans from banks and informal sources to raise capital. To enable these enterprises greater access to finance, two SME exchanges have been launched in Mumbai recently.

It is heartening to hear the finance minister re-iterate the fact about the importance of MSME to the economy. The creation of the exchanges specifically for MSME to gain access to the otherwise tough capital markets is definitely a step worth recognising. Though very early to opine on the success of such exchange, if the intent of the institution is held onto it might actually enable the move for a number of MSMEs who have immense potential in their business models for scale into high growth large enterprises.

73. With the objective of promoting market access of Micro and Small Enterprises, Government has approved a policy which requires Ministries and CPSEs to make a minimum of 20 per cent of their annual purchases from MSEs. Of this, 4 per cent will be earmarked for procurement from MSEs owned by SC/ ST entrepreneurs.

Again a well intentioned budget feature by the government over many years. However there is ample lack of clarity over how this should be implemented. Access to these contracts remains both difficult and incomprehensible, especially for an early stage institution. If some of the above orders or procurements are provided to worthy MSME units, it can boost not just their top-line and bottom-line but also the confidence in the entrepreneur/team. Failure to demonstrate success in this will only relegate this worthy step to just a well intentioned thought.

149. For SMEs, the turnover limit for compulsory tax audit of accounts as well as for presumptive taxation is proposed to be raised from `60 lakh to ` 1 crore.

This definitely reduces the amount of effort and costs that young companies spend on compliance related processes.

150. In order to augment funds for SMEs, I propose to exempt capital gains tax on sale of a residential property, if the sale consideration is used for subscription in equity of a manufacturing SME company for purchase of new plant and machinery.

This particular exemption could encourage enterprises to make investments for capacity expansion without hurting their profitability calculations. This could be extremely helpful for early stage entrepreneurs to attract people selling properties to invest in them. It helps the investor to reduce the tax burden without locking up money in another property, provides the entrepreneur with one more source of funds, and creates an alternate investment product for the investor.

155. Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value.

This seems to be read by many entrepreneurs as a controversial statement, ‘fondly’ referred to as ‘StartupTax! If one looks closely at the intent behind inclusion of this clause, it would become clear that from a macro-economic fund flow perspective, it is plugging off a possible hole for movement of unaccounted cash. Because of the subjective nature of the clause, implementation hassle on what would be the fair market value can create dissent on either side.  Especially, as a large investment in this category would go towards young firms (start-ups) who have very little other than great ideas and entrepreneurial spirits.  If the clause is implemented in its right spirit or intent, it will make the great debate around this subjective clause irrelevant. The verdict can only be provided in hindsight.

194. Our MSME sector is fertile ground for the production of low-cost medical devices. In order to provide impetus to this sector, I propose to reduce basic customs duty to 2.5 per cent with concessional CVD of 6 per cent on specified parts, components and raw materials for the manufacture of some disposables and instruments. Full exemption from basic customs duty and CVD is also being extended to specified raw materials for the manufacture of coronary stents and heart valves. These concessions would be subject to actual user condition.

With growing interest in Entrepreneurial activities especially in the medical field this clause could provide impetus to aspiring and existing entrepreneurs, to become competitive not just domestically but also in the global market. This reduction in the input costs can help MSME enterprises price their products competitively and if possible also enjoy larger profits. This could help them in reducing their cost of capital through reinvestments.

While the above are just proposals tabled by the finance minister, much remains to be seen in what form these actually get approved and the effectiveness with which they be implemented. Hence as with any policy a number of “Ifs” remain to be answered….