In India’s Micro, Small, and Medium Enterprise (MSME) sector, the surge in registrations under the Udyam Registration scheme has drawn considerable attention.
The government had launched the scheme in July 2020, aimed at streamlining the registration process for MSMEs and offering various benefits and incentives to the users.
However, behind the facade of escalating numbers lies a nuanced reality that demands closer scrutiny.
Recently, the minister of state for MSMEs submitted in the Rajya Sabha that as on March 14, 2024, total registered MSMEs stood at 39 million (24 million MSMEs and 15 million Udyam-assisted informal micro enterprises).
On February 8, he also revealed that since the initiation of the Udyam registration portal, following the COVID-19 pandemic, the count of MSMEs that have ceased operations has escalated to 35,680 as of February 5, 2024. This number includes those MSMEs which cancelled their registration. However, cancelling of the registration is neither mandatory nor necessary for the enterprises, specifically for informal ones. So, the number is likely much more than this.
At first glance, the numbers appear promising. According to the ministry, over 1.5 million enterprises registered under the Udyam scheme in the first year alone. This surge was particularly notable during the initial months after the launch, indicating a significant uptake among entrepreneurs eager to formalise their businesses. Without doubt, the initiative of digitalisation of the registration process is a good initiative to start with. But this is not a comprehensive solution for the MSMEs to celebrate.
First, we need to be clear about the basic concepts of informality and formalisation. Simply registering on a portal cannot be seen as formalising the MSMEs, nor does it ensure that the sector is captured in the policy framework.
Moreover, Indian MSMEs are mostly nano-enterprises, with very limited resources. So they need to consider the benefits for their business while registering on the Udyam portal.
The ‘Benefits of Udyam registration’ factsheet says that other than easy access to bank credit or priority sector lending (despite which MSMEs continue to face a credit crunch), there are no effective benefits to MSMEs for registering in Udyam.
The following points need to be kept in mind when examining the Udyam portal numbers:
- Too easy to register: This might encourage anyone to register without proper business plans or readiness, diluting the credibility of the scheme. This might also inflate the numbers of MSMEs as anyone can register with just their Aadhaar number.
- Automatic integration with government databases: The integration of the online system with government databases is intended to simplify the registration process. However, this is also why some MSMEs are afraid to register, as it is not disclosed which firm data will be integrated with which databases.
- Mandatory PAN and GST number: While mandating PAN and GST numbers from a certain date may enhance data accuracy and compliance, it could pose challenges for smaller enterprises, particularly those in remote or underdeveloped regions. The entrepreneurs could face difficulties obtaining these credentials. This requirement may inadvertently exclude deserving enterprises from availing the benefits of Udyam registration. Though for the informal MSMEs there is an Udyam-assisted platform to register without the GST number.
- Permanent registration and no renewal: The promise of permanent registration and the elimination of renewal requirements may seem advantageous at first glance. However, without periodic reassessment or review mechanisms, there is a risk of outdated or inaccurate information remaining in the system, leading to a loss of credibility and relevance over time.
- Limited impact on business ecosystem: The benefits outlined primarily focus on administrative conveniences and access to financial services, overlooking broader systemic challenges faced by MSMEs. Issues such as access to markets, technology adoption, skill development, and regulatory compliance remain unaddressed, limiting the scheme’s potential to catalyse holistic growth and development in the MSME sector.
While the Udyam Registration scheme offers certain benefits aimed at formalising and supporting MSMEs, critical evaluation reveals several areas for improvement. Addressing these shortcomings and adopting a more comprehensive and inclusive approach is essential to realising the scheme’s potential and fostering sustainable growth and development in the MSME sector.
What is needed?
First of all, there is a dire need for recent data on MSMEs. The last Economic Census of 2019 was never completed.
The fourth MSME census data from 2006-07 was published in 2011, and the NSS’s 73rd round data of unincorporated non-agricultural enterprises (excluding construction) from 2015-16 is the most recent data available for this sector.
The Annual Survey of Unincorporated Sector Enterprise (ASUSE) was started in 2019-20 under the guidance of the Standing Committee on Economic Statistics (SCES) of Ministry of Statistics and Programme Implementation. However, the data or the report are yet to be released.
MSMEs were the worst affected by demonetisation and the poorly designed GST, both of which slowed the economy down each quarter until 2020. Then, an unnecessarily harsh national lockdown, announced with just four hours’ notice, sent the economy and MSMEs reeling again.
The government has not released four annual surveys of NSO on unorganised enterprises since 2019-20, which could have revealed how many MSMEs were forced to close down. Udyam registration is no substitute for making those surveys public.
Udyam can give us some initial numbers of registrations, which is not enough to analyse this sector comprehensively.
Santosh Mehrotra is a Research Fellow at IZA Institute of Economics, Bonn. Tuhinsubhra Giri is pursuing a PhD from JNU on MSME clusters and has been a researcher at the Labour Bureau and RIS.
