Revised MSME Classification and their Implications

Context

The revision of Micro, Small, and Medium Enterprises (MSME) classification criteria in the Union Budget 2025 has sparked significant debate among stakeholders. While the government aims to foster growth and scalability for MSMEs, concerns have been raised by micro and small enterprises about the potential adverse effects of these changes.

Revised MSME Classification: A Brief Overview

The Union Budget 2025 introduced a substantial upward revision in the investment and turnover limits for MSME classification. This change, effective from April 1, 2025, aims to help enterprises scale up operations while retaining their MSME status.

New Classification Criteria

This revision increases the investment cap by 2.5 times and turnover limits by 2 times across all categories.

Government’s Rationale for Revision

In her Budget speech, Finance Minister Nirmala Sitharaman highlighted that MSMEs contribute significantly to India’s economy:

• Employing 7.5 crore people.
• Generating 36% of manufacturing output.
• Accounting for 45% of exports.

The revised criteria aim to enable MSMEs to achieve economies of scale, adopt advanced technologies, and access better financial resources.

Concerns Raised by Micro and Small Enterprises

• The impact on public procurement incentives: Micro and small enterprises are presently given a public procurement quota for 25% under the Public Procurement Policy. This quota provides a certainty of demand for their products and services. However, with the revised classification, large companies that are now considered micro or small enterprises may be able to dominate the quota and discount genuinely smaller players.
• The challenge of priority sector lending: MSMEs are considered priority sector lending, with the PSL directed towards sub-targets for micro enterprises. Inclusion of larger companies in the definition of micro could, therefore, dilute the real access of PSL benefits to very small enterprises.
• Objections by Laghu Udyog Bharati: Laghu Udyog Bharati, representing micro and small enterprises, has raised an issue stating that the medium-sized firms, under the newly defined taxation plan into small or micro, will `corner’ the benefits meant for the smaller players. They contend that 99.99% of MSMEs are micro or small, while medium firms account for less than 0.01%. The new definitions will disproportionately favour medium firms implemented to the disadvantage of small enterprises.

Potential Benefits of the Revised Classification

Despite concerns, some experts argue that periodic revisions are necessary to account for inflation, rising raw material costs, and geopolitical challenges. Key benefits include:

• Enhanced Scalability: The new limits allow MSMEs to expand operations without losing access to government schemes.
• Improved Credit Access: Higher thresholds facilitate better access to capital through schemes like collateral-free loans.
• Technological Upgradation: Larger firms can invest in advanced technologies while retaining their MSME status.

Broader Implications of the Changes

• Tax Compliance and Payment Timelines: Section 43B(h) of the Income Tax Act mandates timely payment to micro and small enterprises. With more firms qualifying as micro or small under the revised criteria, buyers must ensure strict compliance with payment deadlines to avoid tax disallowances.
• Regulatory Compliance: The increased number of MSMEs will lead to a surge in registrations on the UDYAM portal. Enterprises will need to adapt to new compliance requirements under the revised framework.

Balancing Growth with Equity: The Way Forward

While the revised classification aims to promote growth and scalability, it is essential to address concerns raised by micro and small enterprises:

• Separate Sub-Categories: Introducing sub-categories within micro and small enterprises could ensure equitable distribution of benefits.
• Monitoring Mechanisms: Establishing mechanisms to track the impact of these changes on smaller players can help mitigate unintended consequences.
• Periodic Reviews: Regular reviews based on updated data can ensure that classification criteria remain relevant without disadvantaging any segment.

Conclusion

The revised MSME classification reflects the government’s intent to empower businesses by fostering growth and innovation. However, it also raises critical questions about equity and inclusivity within the sector. Striking a balance between enabling scalability for larger firms while safeguarding the interests of genuinely small enterprises will be crucial for ensuring sustainable development in India’s MSME ecosystem.

Source: The Indian Express

UPSC Mains Practice Question

Q. MSMEs are often described as the backbone of the Indian economy. However, they continue to face several structural and operational challenges. Critically examine the role of MSMEs in India’s economic development and suggest measures to overcome the key issues they face.

Download as PDF