The micro, small and medium enterprises (MSMEs) sector contributes nearly 45% of the country’s industrial output and 40% of its exports. Despite their significance, the MSMEs’ challenges have only increased for three reasons: demonetisation, followed by some degree of forced ‘formalisation’ (of sorts) due to GST, and then an ill-planned lockdown of unnecessarily harsh strictness, needlessly national in scope (March 2020, when there were less than 600 Covid cases).
First, how many MSMEs are really under the policy lens? Schemes, subsidies or new policy initiatives like Emergency Credit Line Guarantee Scheme (ECLGS), Prime Minister’s Employment Generation Programme (PMEGP), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Micro and Small Enterprises Cluster Development Programme (MSE-CDP) and Scheme of Fund for Regeneration of Traditional Industries (SFURTI) are for registered enterprises. When the Centre talks about new schemes, subsidies or policy initiatives, it is merely supporting those registered enterprises.
How many MSMEs are registered? It’s not very clear. After the implementation of the Micro, Small & Medium Enterprises Development (MSMED) Act in 2006, the fourth MSME census was the first to be executed for both registered and unregistered MSMEs. It found that in 2006–07, 1.55 million MSMEs were registered, 5.9% of the 26.1 million MSMEs active at that time. That was the last census. Moreover, while the government has conducted the 7th Economic Census in 2019, which could reveal changes in the state of MSMES between 2013 (6th Economic Census) and 2019, that data has not been made public.
Also read: Development Gone ‘Rogue’ and the High Flood in Delhi
Though the National Sample Survey (NSS) conducts the Unincorporated Non-Agricultural Enterprises (Excluding Construction) sample survey in a five-year interval, the latest one is the 73rd round in 2015–16. According to the 73rd round NSS data, only 30% of the total estimated 63 million MSMEs were registered, which is not a bad number for the informal sector. But it took decades to get to this. NSS collected this data on registration under a list of acts and authorities. Surprisingly, this list did not include the MSMED Act, 2006, or MSME registration.
Furthermore, registration under these acts or authorities of MSMEs is a mere formality. It is also not synonymous with formalisation. These acts or bodies only register about 30% of unorganised firms. Formalisation under Factories Act registration assures social security benefits and other benefits to the firms, but registration under other acts or authorities changes nothing. The introduction to the 7th Economic Census states that its objective would be to create an Indian business registry. That still seems a far cry in the wilderness.
A major hurdle for MSMEs is the cumbersome process of registering with government agencies. Currently, MSMEs need to register under various schemes such as GST, the Ministry of Corporate Affairs and Udyam. This adds to their administrative burden and also creates confusion and duplication of effort.
In July 2020, the government launched the Udyam registration portal as a unified platform for MSMEs to register and obtain various certifications. However, the number of MSMEs which did so remains meagre ― 14.3 million. This is a fraction of the estimated 63 million MSMEs in the country in 2015-16 (NSO). But this data is also too old to use because the 73rd NSS survey round (2015-16) used the fifth Economic Census (2005) as the sampling frame. We don’t even have any comprehensive regular database to monitor the second largest sector after agriculture.
Also read: ‘There Are No Jobs in Our Village’: Rising Costs, Stagnating Wages Exacerbate Rural Distress
Poor registration raises issues:
1) A significant portion of MSMEs in India are not on the books and operate in the informal sector. They may prefer to remain unregistered to avoid regulatory scrutiny, taxes and compliance.
2) After registering, MSMEs have to comply with various statutory requirements, such as maintaining books of accounts, filing returns and adhering to laws/rules. This could be daunting for small business owners without the resources to hire professionals for compliance.
3) While MSMEs in India are eligible for several incentives such as subsidies, tax benefits and credit guarantees, many small business owners may not find these significant enough to justify the registration process.
4) Lack of awareness among MSMEs about the importance of registration and its benefits.
5) At present, the process involves obtaining multiple registrations, such as for GST, Udyam and other state-specific registrations.
In addition, the government must also ensure that the benefits of registration that reach MSMEs exceed the costs. Easy access to credit, infrastructure support and a simplified tax regime would help.
Santosh Mehrotra is Professorial Fellow, Nehru Memorial Museum & Library and Tuhinsubhra Giri is Fellow at Research and Information System for Developing Countries.
