The micro, small and medium enterprise (MSME) sector is the second-largest employer in India, coming in just behind the agrarian sector. The MSME sector plays a critical role in the Indian economy. The central government has set itself the target of making India a US$5 trillion economy by 2025 and the MSME sector has a key role to play in achieving that objective by transforming India into a manufacturing hub.
The central government and various state governments have launched policies and frameworks for developing and encouraging the MSME sector. The Ministry of Micro, Small and Medium Enterprises is a nodal agency whose remit is to implement central government frameworks for the benefit of the sector. Various state governments have their own schemes. The government has enacted The Micro, Small and Medium Enterprises Development Act, 2006 (MSME act) to facilitate a uniform and enabling policy environment for the MSME sector.
The MSME act defines micro, small and medium sized enterprises depending on the value of plant and machinery for manufacturing entities and the value of equipment and services sector. The categories are as follows:
Micro: investment in plant and machinery – not more than ₹2.5 million (US$34,875); investment in equipment – not more than ₹1 million;
Small: investment in plant and machinery – ₹2.5 million to ₹50 million; investment in equipment – ₹1 million to ₹20 million, and
Medium: investment in plant and machinery – ₹50 million to ₹100 million; investment in equipment – ₹20 million to ₹50 million
The MSME ministry has issued detailed guidelines on what will be included and what will be excluded in calculating the value of plant and machinery for the purposes of the MSME Act. The government has proposed changing the classification based on the value of plant and machinery, to one based on the turnover of the enterprise and a law to bring about this change is expected soon.
The government has instituted various schemes and incentives to allow MSMEs easier access to funds, to modernize the sector and to make it more competitive in the global market by facilitating effective quality control, by supporting technology upgrading, through incubation and mentoring and by providing credit-linked capital subsidies, and schemes that make it easier to get subsidies. Although it is not mandatory to be registered under the MSME act, obtaining a registration under it provides financial and other benefits to enterprises. Benefits include easy approval of bank loans, lower rates of interest, excise exemptions and statutory support such as interest on delayed payments.
A major benefit provided is that a payment due to micro and small enterprises must be paid within 45 days from the day of acceptance or deemed acceptance. The act prescribes a higher rate of interest in case of delay and provides a dispute resolution mechanism for speedy resolution of payment related disputes. In addition, various state governments offer incentives to MSMEs such as tax holidays, partial refund of goods and services tax, reduced electricity charges, reduced stamp duty and so on. The Zero Defect Zero Effect policy of the government also benefits SMEs and small businesses by giving incentives to minimise defects in their products and encouraging them to work in an environmentally friendly manner.
The government’s Make in India programme facilitates and encourages Indian enterprises including MSMEs to collaborate with their global counterparts with the aim of manufacturing in India following global best practices and incorporating the latest technology. India has one of the most liberal foreign direct investment (FDI) policies in the world. 100% FDI under the automatic route is permitted in most sectors and activities with only a small list of regulated sectors and activities. The FDI policy applies equally to the MSME sector. Korean businesses can enter into collaborative agreements with Indian MSMEs or set up their subsidiaries in India and will be eligible for government incentives for MSMEs. The India-Korea Technology Exchange Centre (IKTEC) in New Delhi assists Indian MSMEs and South Korean enterprises to form alliances to build complementary competencies and be competitive in global markets. A memorandum of understanding has also been signed between the National Small Industries Corporation on the Indian side and Small and Medium Business Corporation from South Korea. Government incentives and the push for the development of the MSME sector presents a great opportunity for Korean businesses to invest in the sector in India as the policy environment is favourable and mutually beneficial to enterprises from each country.
Rajat Prakash is the managing partner of Athena Legal and Siddharth Mahajan is a partner at the firm.