MSME Landscape. Is there any room for Regulatory Reforms?

Key Takeaway-

• MSME landscape is dynamic and complex. Nevertheless, the contribution of MSMEs to the economy cannot be understated, and continued efforts are required to support and empower them.
• Previous year reforms have had a positive impact on the MSME landscape, leading to increased formalisation, access to credit, and digital integration.
• There is still room for further regulatory reforms, particularly in streamlining compliances and addressing any remaining challenges related to access to financing and market opportunities.

According to a World Bank report titled "World Development Report 2018: Learning to Realise Education's Transformative Power," Micro, Small and Medium Enterprises (MSMEs) play a role that cannot be missed in most economies. Especially in developing countries. In fact, MSMEs constitute over 90% of the total number of businesses, employ around 50% of the workforce, and heavily contribute to the GDP in many countries.

What constitutes the MSME?

The classification of an MSME varies from country to country. The European Union, for instance, defines a small enterprise as having fewer than 50 employees and an annual turnover of less than €10 million, while the United States defines small businesses as having fewer than 500 employees.

The International Finance Corporation (IFC), which is a member of the World Bank Group, defines a micro-enterprise as an unincorporated business with fewer than 10 employees and annual sales of less than $100,000, a small enterprise as having fewer than 100 employees and annual sales of less than $1 million, and a medium-sized enterprise as having between 100 and 3,000 employees.

How do they operate?

MSMEs operate across various sectors, including manufacturing, services, construction, and retail. In India, for example, MSMEs contribute around 30% to the GDP and employ approximately 120 million people, mainly in the manufacturing sector. Despite their significant contribution to the economy, they face several significant challenges, including limited access to finance, inadequate infrastructure, regulatory barriers, lack of skills, and limited access to technology.

Policymakers and governments are increasingly recognising the role MSMEs play in promoting economic growth and development. Hence, there has been a concerted effort to support MSMEs, through measures such as access to finance, provision of infrastructure, simplification of regulatory and legal frameworks, capacity building, and access to technology and markets.

Previous Budget on MSMEs

The Union Budget for the year 2023-24 introduced several key initiatives benefiting MSMEs. Like enabling timely payments by allowing tax deduction for expenditure incurred on payments made to them only when payment is actually made. Also, the revision in the definition of MSMEs under the scheme of Aatmanirbhar Bharat. The introduction of TReDS (Trade Receivables electronic Discounting System) to address delayed payments has benefited MSMEs by strengthening their financial stability and operational efficiency.

According to the Economic Review 2024, the impact of these reforms has been phenomenal. The Udyam portal and the Udyam Assist Platform (UAP) have consolidated information on MSMEs, with 2.24 crore MSMEs registered on the Udyam portal and about 1.2 crore units registered on the UAP. Additionally, the PM Vishwakarma initiative is offering support to artisans and craftspeople. And this has attracted 48.8 lakh enrolments as of the end of December 2023.

Under the Pradhan Mantri Mudra Yojana (PMMY), loans amounting to ₹25.98 lakh crore have been disbursed to non-corporate, non-farm small and micro enterprises.

Conclusion

The government's supportive measures and reforms have played a major role in strengthening the MSME sector's resilience and growth. However, as the Economic Review of FY 2023-24 suggests there is ample scope for regulatory reforms. To accelerate growth and development of MSMEs in the years to come.

So, it’s essential to continually assess the regulatory environment to ensure that it is contributing to the constant growth of the MSME sector.