Small firms fear new MSME definitions favour giants, cry foul

Per a government notification that took effect on 1 April, small companies’ definition has been changed to those with investments in plant and machinery less than ₹25 crore (from ₹10 crore earlier) and turnover less than ₹100 crore ( ₹50 crore earlier). This effectively means companies with turnover between ₹50 crore and ₹100 crore, which were classified as medium earlier, now get into the domain of small companies.

While the move is aimed at easing these companies’ access to public procurements, an electronic marketplace for exports, and dispute resolution services, many small businesses worry that this provides undue advantage to the larger rivals, which will now enjoy perks reserved for the smaller firms.

“Due to the revision as above, medium-level units at present will now fall under the small category, and small will come under the micro category; thereby, medium units will be sharing the benefits meant for micro- and small-level industries,” Laghu Udyog Bharati, an organization that represents more than 50,000 small businesses, wrote to the Union MSME ministry on 12 March.

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“We foresee the adverse impact of above enhancements on micro and small-scale units who constitute about 99.99% of MSMEs, whereas a handful of medium-level units as they are less than 0.01%, are expected to corner such benefits,” said the organization in its letter. Mint has seen a copy of the letter.

The MSME body has also pushed for including export revenue in calculating sales in an attempt to keep the larger players out of the category.

To be sure, the definitions of medium and micro enterprises have also been revised. Medium enterprises have now been classified as those with investments up to ₹125 crore ( ₹50 crore earlier) and turnover up to ₹500 crore ( ₹250 crore earlier). And micro businesses can invest up to ₹2.5 crore in plant and machinery and achieve an annual turnover of up to ₹10 crore, up from the previous limits of ₹1 crore and ₹5 crore, respectively.

However, Laghu Udyog Bharati said it is too early to double the limits on investment and raise the limit on turnover by two-and-a-half times and “no tangible benefits can be achieved by simply revising their classification”.

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Queries emailed to the MSME ministry remained unanswered. Mint could not reach Laghu Udyog Bharati for its views.

Business that are in the thick of the changes say definition changes are needed to ensure they keep receiving benefits of government credit facilities for small companies if they grow out of their category.

“In order to keep availing these benefits, the limits on turnover and investment in MSME definitions need to be revised periodically,” said Nahush Gulawani, managing partner of Wit and Chai Group, a Pune-based media consultancy, registered as a small enterprise. “If I want my business to keep receiving credit guarantees, public procurement contracts, or any other benefits which allow it to grow, then that growth should also be factored into the investment and turnover limits which define MSMEs.” 

Expert views

Other industry associations supported the change in definition. “Medium enterprises represent a very small part of the MSME pie,” said Anil Bhardwaj, secretary general of Fisme (Federation of Indian Micro and Small & Medium Enterprises), which primarily represents about 15,000 medium enterprises in the manufacturing sector. “It is unlikely that the benefits they receive will eat into the benefits for small or micro enterprises.”

Also read | Small firms find it hard to get export finance. Relief may be on way.

It is crucial for every MSME, especially in the manufacturing sector, to be competitive globally from inception, Bhardwaj explained. He said the investment and turnover criteria are periodically revised to keep pace with inflation.

“Since the last revision in 2020, the world has seen two major wars, and one pandemic. There is a lot of global uncertainty. At the same time, with global supply chain disruptions, turnover of MSMEs experienced an increase due to price inflation. That is why a revision in the definition was necessary,” said Bhardwaj.

If the limit had not been increased, in a majority of product categories, small companies would have become excluded from public procurements, he said.

Kiran Limaye, assistant professor at Gokhale Institute of Politics and Economics, explained that the contribution of micro enterprises to gross value added has been declining over the years. “It has been only five years since the definitions were changed. For micro businesses to double their turnover in this period, they would need to grow at 14% annually, a phenomenon which is inconsistent with their declining share in the nation’s GVA,” said Limaye, an expert on growth and development of MSMEs and the unorganised sector.

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As per a July 2024 statement by the MSME ministry, the contribution of MSMEs to the nation’s GVA has risen to 30.1% in FY23 from 29.6% in FY22. But this is still lower than pre-covid levels in FY20, when the MSME sector’s contribution to the nation’s GVA was 30.5%.

Laghu Udyog Bharati said the ministry had used data from an FY16 MSME survey for making the change, and that the share of micro and small enterprises in the MSME universe is slightly lower now.

The last revision of these limits was done in 2020, during the covid-19 pandemic. Since the ministry used data from 2015-16 to assess the state of affairs in FY24, it did not account for the impact of the 2020 amendment, the organization said. The industry body proposed that budgets for micro, small, and medium enterprises be allocated individually for each category depending on the number of units and the support needed by them.

In her budget speech for FY26 where she identified MSMEs as a growth engine for India, Union finance minister Nirmala Sitharaman announced that the credit ceiling under the Centre’s MSME credit guarantee scheme would be doubled to ₹10 crore. This came into effect on 1 April with the beginning of a new fiscal year, as per an 18 March notification.

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The development assumes importance as MSMEs are responsible for 36% of India’s manufacturing, as well as 45% of its exports. They are also a lifeline for the masses, employing over 266 million, or more than a third of the nation’s workforce.