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Impact of New Definition over MSMEs

16th June 2020 | NOIDA | INDIA

Micro, Small and Medium Enterprises (MSME) contribute to around 6.11% of the Manufacturing and 24.63% of the Service GDP of India. Definition of MSME was introduced through Micro Small Medium Enterprise Development (MSMED) Act, 2006. Contribution of MSME to Indian socio-economic growth has been remarkable and the facts below justify this.

  • MSMEs contribute to 45% of India’s total industrial employment
  • MSMEs contribute to 50% of India’s total exports
  • 95% of all industrial units of the country are MSMEs
  • More than 6000 types of products are manufactured by MSMEs
  • MSMEs offer products and services at a relatively lower price
  • MSMEs are a major contributor to industrialization and employment in rural and backward areas
  • MSMEs reduce regional imbalances through the optimum utilization of their resources

In the light of above, it was necessary to safeguard this sector through some kind of reservation. Companies registered under MSME get some benefits like;

  • Concession in bank loans interest rate.
  • Tax Rebates
  • Payment Support
  • Many government tenders are only open to the MSMEs
  • No or less Fees and EMDs in government tenders
  • Higher preference for government license and certification
What is the new definition of MSME?

COVID-19 pandemic has led to a Nation-wide lockdown for 2 months and is still continuing with some relaxations. Amidst of this, it was necessary to back MSME sector which was estimated to contribute 50% of Indian GDP by 2024.
In order to revive Indian Economy, Government of India launched Atmanirbhar Bharat Abhiyaan backed with an investment of INR 20 Lakh Crores. The package includes bold reforms aimed to boost businesses with a major focus on the MSMEs. In order to prevent MSMEs from collapsing, Union Cabinet redefined MSMEs.

Why was this new definition needed?

  1. In 2006, the definition of MSME was frozen. With depreciation of Indian currency over the 12 years, thresholds have become unrealistic. Inflation adjustment would have allowed the cap to be increased by 2-3 times.
  2. The investment-based concept provided an unequal field for older company’s vis-à-vis new undertakings. Establishing a production unit today definitely requires several times more investment than the similar one set-up ten years ago.
  3. Government of India announced a financial package amidst pandemic, but many MSMEs were apprehensive to avail loans as they might have lost their MSME status and benefits. Therefore, it became necessary to change the threshold in order to attract MSMEs to raise investments.

How will the new definition help MSMEs?

  1. Increasing the threshold has undoubtedly increased the possibilities for both manufacturing and service sectors.
  2. More number of firms can register under MSME. This will enable them to avail financial support and other exemptions from government ensuring their growth and sustainability in this tough time.
  3. As the “Criteria of Investment Only” has been eliminated, MSMEs will avail loans and will not hesitate in making investment in their businesses. This will finally lead to higher production, more job creation and socio-economic growth.

Like any other scheme, this new definition of MSMEs has some challenges which need to be well handled to make it a success. Inclusion of more firms in the MSME category could crowd out which may diminish chances of deserving small-scale manufacturers and service providers to get benefitted with concessional loans and various government plans.

Overall, the current definition represents a significant improvement over the earlier one and shall help MSMEs to address new challenges in a better context. This will enable them to increase production and create jobs which will play a vital role in the success of Atmanirbhar Bharat Abhiyaan.



About Author

Pradeep Kankarwal holds rich experience of more than a decade in Supply-Chain & Procurement.
Connect with him at
[email protected]


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