Informal sector MSMEs losing out, need to be in policy net

A significant portion of MSMEs are not in any books and they operate in the informal sector. So, they may not see the need to register.
Image used for representative purposes only.
Image used for representative purposes only.

The micro, small, and medium enterprises (MSMEs) sector contributes nearly 45 per cent of the country’s industrial output and 40 per cent of its exports. Despite their significance, the MSMEs’ challenges have only increased for three reasons: demonetisation, followed by some degree of forced ‘formalisation’ (of sorts) due to GST, and then an ill-planned lockdown of unnecessarily harsh strictness, needlessly national in scope (March 2020, when there were <600 Covid cases).

First, how many MSMEs are really under the policy lens? Any declared schemes, subsidies or new policy initiatives like the Emergency Credit Line Guarantee Scheme (ECLGS), Prime Minister’s Employment Generation Programme (PMEGP), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Micro and Small Enterprises Cluster Development Programme (MSE-CDP), Scheme of Fund for Regeneration of Traditional Industries (SFURTI), etc., are supposed to be for registered enterprises only. So, whenever the Centre talks about any new schemes or subsidies or new policy initiatives, it is merely supporting those registered enterprises.

So the next question is: how many MSMEs are registered? Registration of MSMEs is not very clear and simple to understand. After the implementation of the MSMED Act in 2006, the fourth MSME census was the first census for both registered and unregistered MSMEs in the country. As per this census in 2006–07, 1.55 million MSMEs were registered, i.e., 5.9 per cent of the total 26.1 million MSMEs at that time. After this census, there has been no such census till now. Moreover, while the Centre conducted the seventh Economic Census in 2019 which could reveal the changes in the state of MSMEs between 2013 (the sixth Economic Census) and 2019, that data has not been made public.

Though the National Sample Survey (NSS) conducts the Unincorporated Non-Agricultural Enterprises (Excluding Construction) sample survey every five years, the latest one is the 73rd round in 2015–16. As per the 73rd round NSS data, only 30 per cent of the estimated 63 million MSMEs were registered, not a bad number for the informal sector. But it took decades to get to this. NSS collected this data on the registration of MSMEs if an enterprise was registered under a list of acts/authorities. Surprisingly, this list did not include the MSMED Act, 2006, or MSME registration.

Furthermore, registration under these acts or authorities is a mere formality. It is also not synonymous with formalisation. These acts or bodies only register about 30 per cent of the unorganised firms. Formalisation under Factory Act registration tends to assure social security benefits and other benefits to the firms. But registration under other acts or authorities is only a simple registration, and the firms remain the same as before such registration. The introduction to the seventh Economic Census states its objective is to create a Business Registry in the country. That objective still seems to be a far cry in the wilderness.

A major hurdle for MSMEs is the cumbersome process of registering with government agencies. Currently, MSMEs need to register under various schemes such as the Goods and Services Tax (GST), the Ministry of Corporate Affairs (MCA), and Udyam. This not only adds to the administrative burden of MSMEs but also creates confusion and duplication of effort.

In July 2020, the Centre launched the Udyam registration portal as a unified platform for MSMEs to register and obtain various certifications. But the number of MSMEs registered under the Udyam registration portal remains meagre, i.e., around 14.3 million. This is only a fraction of the 63 million MSMEs. But this data is also too old to use because the 73rd NSS survey round used the fifth Economic Census (2005) as the sampling frame. So, it is evident that we are not interested to know the current scenario of the MSMEs.

Every year, the MSME ministry’s annual report also uses this estimated figure of 63 million, yet it has no plan to bring the remainder into the policy net. We don’t even have any comprehensive regular database to monitor the second largest sector after agriculture. The low registrations raise five issues:

1) A significant portion of MSMEs in India are not in any books and they operate in the informal sector. So, they may not see the need to register. They may prefer to remain unregistered to avoid regulatory scrutiny, taxes, and compliance.

2) After registering, MSMEs have to comply with various statutory requirements, such as maintaining books of accounts, filing returns, and adhering to some laws/rules. This could be daunting for many small business owners who may not have the resources to hire professionals for compliance or go to some professional to do so.

3) Lack of incentives is another factor. While MSMEs in India are eligible for several incentives such as subsidies, tax benefits and credit guarantees, many small business owners may not find these significant enough to justify the registration process. The real question is if the benefits of a registration exceed the cost of having to pay taxes that go beyond what owners might pay in personal income tax (if they pay the latter at all). Sometimes, the schemes or policies are immaterial for the MSMEs in distress after demonetisation, GST and Covid-—a triple hit back to back.

4) Lack of awareness among MSMEs about the importance of registration and its benefits: they are often unaware of the schemes and benefits, leading to missed opportunities for growth and development.

5) The registration process should be straightforward as this could encourage many small business owners to register. At present, the process involves obtaining multiple registrations, such as for GST, Udyam and other state-specific registrations.

The Centre must also ensure that the registration benefits exceed costs. This includes easy access to credit, infrastructure support, and a simplified tax regime. There could be initiatives to create more favourable conditions for informal sector MSMEs to transition to the formal sector.

Santosh Mehrotra

Visiting Professor, Centre for Development Studies, University of Bath, UK

Tuhinsubhra Giri

Fellow in ASEAN India Centre at Research and Information System for Developing Countries (RIS), New Delhi

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