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Revision of MSME definition in midst of Covid pandemic: Investment and employment implications

Ease of Doing Business for MSMEs: In general, periodic definition revision of MSMEs is justified on the following three grounds: to take account of inflation, to facilitate technology up-gradation and modernization of enterprises, and to enable expansion of the scale of operations.

Ease of Doing Business for MSMEs: As part of the Atmanirbhar Bharat scheme, the government of India revised the definition of MSMEs in India on 13th May 2020. This definition revision has three important dimensions: investment limit is raised, additional criteria of turnover is added, and the distinction between manufacturing and service sector is eliminated.

In the process, the investment limit for micro manufacturing enterprises is increased four times, from Rs 2.5 million to Rs 10 million whereas that of micro service enterprises is increased by 10 times, from Rs 1 million to Rs 10 million. The investment limit for small manufacturing enterprises doubled from Rs 50 million to Rs 100 million and that for small service enterprises increased five times from Rs 20 million to Rs 100 million. The investment limit for medium-sized manufacturing enterprises, doubled from Rs 100 million to Rs 200 million whereas, for medium-sized service enterprises, it quadrupled from Rs 50 million to Rs 200 million. The newly introduced turnover limit is fixed at Rs 50 million for micro-enterprises, Rs 500 million for small-sized enterprises, and Rs 1000 million for medium-sized enterprises.

This revision has come after 14 years after the last revision made along with the promulgation of the MSMED Act, 2006. The rationale for the latest revision put forward by the government is two-fold: (i) Low investment threshold for MSMEs is discouraging them to grow, due to the fear of losing concessions and benefits meant for the sector once the investment limit is crossed, and (ii) There have been long pending demands for a revision. It is interesting to note that the definition revision was introduced as one of the policy measures to address the concerns of the MSME sector to mitigate the impact of the Covid-19 pandemic. 

In general, periodic definition revision of MSMEs is justified on the following three grounds: to take account of inflation, to facilitate technology up-gradation and modernization of enterprises, and to enable expansion of the scale of operations. 

In high-inflation-oriented developing economies, inflation, of course, should be a factor prompting a periodic upward revision in the investment limit. Further, given the widely prevalent technological obsolescence of enterprises in the sector in developing economies, there needs to be a constant thrust on technology up-gradation and modernization of firms. If technology up-gradation/modernization has to occur through technology imports, the issue of steadily deteriorating exchange value of the domestic currency must be considered.  

Finally, if firms have to expand their scale of operations by acquiring additional machinery and labour, higher prices of machinery (due to inflation within the country or due to depreciation of the domestic currency, if procuring from abroad) will necessitate a hike in investment limit. For all these reasons, the upward revision in the investment limit will always more than compensate for the inflation and currency depreciation. But the core issue is how will it help the sector to mitigate the Covid-19 pandemic impact? Given this, what impact it will have on employment, the most significant criteria for the promotion of MSMEs in India? This requires an understanding of the possible outcomes of the recent investment limit hike. 

In normal times, an increase in investment limit for MSMEs will have these possibilities: existing enterprises will go for technology up-gradation and modernization that may be labour-saving, existing enterprises will deliberately shift to capital-intensive production methods and thereby will save labour, existing enterprises will expand their scale of operations by employing more machinery and labour, or new enterprises (with state-of-the-art technologies) will emerge, and thereby absorb more investments and generate more employment. 

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Let us first examine which of the above possibilities would have actually occurred and how these developments would mitigate the impact of the Covid-19 pandemic. One major consequence that emerged due to the lockdowns of the first wave and second wave of the Covid-19 pandemic is the large-scale reverse migration of labour from urban to rural areas. As a result, immediately after the first wave led to lockdown, there was a severe shortage of labour in metros, large and medium cities leading to an excess supply of labour in small towns and villages. The first wave led national lockdown (during March-May 2020) resulted in a sharp reduction in supply as well as demand [and a similar impact would have been felt during the second wave led regional lockdowns (during April-June 2021) as well]. 

However, to cope with the rebound consumer demand (for consumer products) followed by industrial demand (for intermediate products), urban Indian MSMEs had to restart production and scale up their operations, as soon as the lockdown was lifted in May 2020. But due to labour constraints, most of the existing MSMEs would have gone for adopting labour saving, capital intensive production techniques. Given the fluid economic environment characterized by uncertain business prospects (due to the ongoing Covid-19 crisis), not many would have gone for technology up-gradation and modernization in the short run. In sectors where consumer demand increased sharply, (such as gloves, safety kits, gowns, sanitizers, soaps, face masks, face shields, immunity-boosting food products, etc.) new enterprises (with state-of-the-art technologies) would have born, in addition to the existing ones. 

Given the above, the recent increase in MSME investment limits would have facilitated a considerable increase in MSME investments (in the registered sector) in urban India to enhance production by adopting capital-intensive production techniques, with little employment gains. On the other hand, if agriculture, apart from the newly created informal enterprises, has absorbed a considerable chunk of the reverse migrated labour in semi-urban and rural India, such labour is unlikely to return to urban India in the near future (due to the onset of monsoon and intensive agricultural activities). Given this, an investment limit hike would have hardly made any impact on the MSME sector in rural India. 

However, the scenario is likely to witness changes in the medium to long run. When the urban economy returns to normalcy (after the mass vaccination programmes, maybe, sometime in 2022 or later), rural-urban migration is likely to resume and gradually gain momentum. The ‘informal entrepreneurship’ which shifted from urban to rural India is likely to get back to urban India. More importantly, there will be a renewed but acute pressure in the urban labour market for employment (due to the influx and excess supply of labour). 

Only if the demand from capital-intensified and newly born MSMEs could absorb the increased labour supply, there will be smooth adjustments. Or else, it will have serious repercussions on wages and salaries of unskilled and semi-skilled labour, to the advantage of MSME owners, and to the disadvantage of labour. Subsequently, if the resultant increase in profits prompts existing enterprises to expand their scale of operations and entry of new enterprises, it would be to the advantage of labour, both in terms of employment and wage rate.