HOW TO ESTABLISH AN MSME IN INDIA
MSME stands for Micro, Small, and Medium Enterprises. It was introduced through the MSMED (Micro, Small, and Medium Enterprises Development) Act of 2006. This Act defines enterprise as “an industrial undertaking or business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods.” MSMEs are classified into two classes: Manufacturing Enterprises and Service Enterprises. These enterprises are then further classified based on their annual turnover and investment in equipment. The Micro, Small, and Medium Enterprises (MSME) sector has been growing significantly for a few years. Its development is essentially linked to the social and economic development of the nation as a whole. Majorly, this sector is labour-intensive as the workers engaging in this sector are usually semi-skilled. This helps in reducing the present economic imbalance between skilled and unskilled or semi-skilled workers. This is also the reason why this sector is the second largest employer after agriculture. In emerging nations like India, MSMEs are seen as the foundation of the economy. MSMEs significantly contribute to the socioeconomic growth of the nation and this sector acts as an accessory unit to other major industries. This sector plays a significant role in providing job opportunities on a large scale at lower costs. It aids in the industrial growth of rural and underdeveloped areas and lessens regional disparities, ensuring a more equal distribution of wealth and national income. By offering employment, access to loans, and other facilities to the artisan class, they have also gradually and gradually revived the craftsman class in India's remote regions.
CHALLENGES TO MSMEs
• FINANCIAL ISSUES- In the Indian economy, smaller industries and businesses have difficulty in obtaining financing so this is a significant barrier for both enterprises and the MSME Sector. Just 16% of MSMEs have access to financing is what is most concerning, as this forces small and medium-sized businesses to rely on their own resources.
This problem impacts not only small enterprises but also larger ones because even larger enterprises have difficulty acquiring more inexpensive financing from traditional banks. People may make poor financial decisions that could affect the firm unless they seek outside guidance. A solid understanding of money is essential because one must rely on an MSME loans to get through any difficulties that may arise. MSMEs face difficulty in accessing capital loans from banks. They are unable to get the required finances to kickstart their business. As the availability of cheap foreign imports is also increasing, the development of these industries has further stooped down. This makes it necessary for the government to intervene in this sector to ensure its continued growth.
Even the All India Management Association has also identified ‘lack of finance’ as one of the major hurdles in the growth of MSMEs. One of the major reasons why investors are not willing to invest in MSMEs is the risk factor involved. As they are still in a nascent stage, they might not be as credit worthy. Therefore, before obtaining a loan it is important to comprehend everything linked to MSMEs loans.
• REGULATORY ISSUE- Several regulatory challenges have been found throughout time, including issues like as business taxes and changes to labour legislation, which have resulted in significant costs for the MSME sector. Certain labour reforms were made a few years ago in an effort to make this industry more competitive among others. Despite making MSMEs more competitive, they struggled to make a difference in changing circumstances for them. As a result, it has become extremely difficult for many Small and medium enterprises to comply with these requirements and register for business taxes.
• DURING COVID-19- COVID-19 has changed the economic scene for MSMEs. The most severe lockdown to prevent the spread of the COVID-19 issue caused the greatest impact to the MSMEs sector, particularly the smallest enterprises. The sudden announcement to follow all protocols of the COVID-19 emergency in the production process caused supply chain problems such as raw material import, movement of people, unemployment, reduced profit, etc. The sector got even more importance with the manufacturing policy wherein the manufacturing sector’s share in GDP is targeted to be from 16% to 25% by the end of 2022. The COVID-19 outbreak reversed the economic progress that had been done through the years. The low demand, lack of funds, and shrinking manpower are all factors that combined to result in many MSMEs going out of business.
CRITERIA TO ESTABLISH MSME IN THE LAW
The eligible categories for MSME registration are proprietorships, Hindu undivided families, partnership firms, one-person company, private limited company, limited company, any association of persons, co-operative societies, or any other undertaking. According to the Micro, Small & Medium Enterprises Development Act, 2006, MSMEs can be recognized under the manufacturing sectors if:
• The investment doesn’t exceed INR 25,00,000 in the case of Micro Enterprises.
• The investment exceeds INR 25,00,000 but doesn’t exceed INR 5,00,00,000 in the case of Small Enterprises.
• The investment exceeds INR 5,00,00,000 but doesn’t exceed INR 10,00,00,000 in the case of Medium Enterprises.
MSME can be recognized for the service sectors if:
• The investment doesn’t exceed INR 10,00,000 in the case of Micro Enterprises.
• The investment exceeds INR 10,00,000 but doesn’t exceed INR 2,00,00,000 in the case of Small Enterprises.
• The investment exceeds INR 2,00,00,000 but doesn’t exceed INR 5,00,00,000 in the case of Medium Enterprises.
The reason for the revised criteria of the MSME is to strengthen this sector and make it grow. It has excluded the exports from the counting of turnover to encourage the MSMEs to export more and more without fearing the loss of benefits granted to an MSME unit. Enhancing the export side will ultimately lead to the creation of jobs in India.
MSMEs are a budding area in India. They are primarily growing as necessarily skilled labour is not necessary for this sector as the work majorly involves manufacturing. However, they face challenges like technological advancement, financial constraints, and the recent pandemic. These challenges need to be overcome to give rural areas a chance at advancement. Presently, the country imports foreign goods that are cheaper in comparison. This option makes people reluctant to spend more money, even if it is for the advancement of their own nation.
To be eligible to establish an MSME, there are certain conditions that need to be met. They are recognized under the Micro, Small & Medium Enterprise Development Act, 2006 providing the conditions therein. After meeting these conditions, it should be a priority to enhance the export side. Only this can lead to the realization of the 5 trillion economy model by 2025 proposed by our Prime Minister, Mr. Narendra Modi
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• Ministry of Micro, Small, and Medium Enterprises Notification, The Gazette of India: Extraordinary [Part II—Sec. 3(ii)]. https://msme.gov.in/sites/default/files/MSME_gazette_of_india.pdf
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Ms. Kashish Shah and Navya Bassi
M/s Aura & Co.