Government to revise investment thresholds for MSMEs

 The government will revise the investments thresholds for micro, small and medium enterprises in line with inflation to encourage them to invest and expand.


NEW DELHI: The government will revise the

investments thresholds for micro, small and medium enterprises in line with inflation to encourage them to invest and expand.

The ministry for micro, small and medium enterprises will propose amendments to remove the definition of small scale industries out of the sector law, which will give the administration flexibility to increase the qualifying thresholds.


The MSME Act, 2006, defines a micro enterprise as the one which has an investment of up to 25 lakh in plant and machinery, those with up to 5 crore and 10 crore investment qualifiy as small and medium enterprise, respectively.

If the change is approved, the limits will be prescribed through rules and guidelines in line with inflation, ensuring that micro, small and medium enterprises expand, or growth with a larger enterprise if they are primarily a supplier of intermediate goods.

"After the discussion in the Parliamentary standing committee, we have finalized the amendments in the Act, and will move them in the Parliament in the next session", said the MSME official.

"We have increased the thresholds of investment in plant and machinery, linking them to the wholesale price index of inflation, 2007 onwards", he said. The small and medium enterprises are often reluctant to breach the prescribed threshold and expand as they would lose the various benefits reserved for them, partly the reason why India's manufacturing has not grown as expected.

"At the moment, a small or medium enterprise does not invest more as it feels it will outgrow the MSME sector" said Sanjay Bhatia, chairman FICCI's cell for these small and medium enterprises.

Complex labour laws have also discouraged expansion as investors feel employing more people will create manpower issues.

Manufacturing share in GDP has slid to 13.6% in 2012-13 from 17% in 2002-03, contributing massively to the so-called problem of jobless growth. Swedish home furnishing company IKEA had also flagged this issue after government imposed conditions that it must source at least 30% good from SMEs.

The company, given IKEA's scale of operations and SME units that it sourced goods from, would quickly outgrowth the prescribed thresholds. Subsequently, the government diluted the sourcing conditions.

The government feels raising the thresholds every few years will encourage the small and medium enterprises to invest more in plant and machinery and grow bigger and add to the manufacturing sector.

"I think we will look at a revision after every three years", he added. The wholesale price index has gone up by 40% between 2007-08 and 2011-12.

Calculation based on that indicates that the new thresholds based on investment in plant and machinery will stand at 35 lakh for micro, 7 crore for small and 14 crore for medium enterprises.

Sector experts welcomed the proposal.

"Keeping the definition out of the Act will add more employment and spur the manufacturing sector," said Anil Bhardwaj, secretary general, Federation of Indian Micro and Small & Medium Enterprises.

"For 5 crore you can't even get half of the machinery you got in 2006," he said.

Today, 30% sourcing from MSMEs is mandatory for FDI in multi-brand retail. If a company like Walmart has to source from MSME, the company needs to be equipped to provide large quantities of products, which requires high investment in plant and machinery to be able to produce more, Bhardwaj pointed out.