MSMED Act – Is it really helping SMEs in India?

In a country riddled with bureaucracy and corruption, a move by the government in 2006 that promised support to the MSME industry was a breath of fresh air. The Micro, Small and Medium Enterprises Development Act (MSMED Act) of 2006 was enacted with great hope and promise. Its primary aim was to promote and develop this nascent industry while increasing competitiveness within it. It’s been a decade since, but has the act really benefitted SMEs in India?

MSMED Act – The Good, the bad and the ugly

MSME’s being the backbone of India, had been neglected and suffered for decades with no growth. When the MSMED Act was enacted in 2006, a National Board of Micro, Small and Medium Enterprises was also established. The Board had decided to implement the Act by helping employees, the management and entrepreneurs in this industry improve their skills and assist these enterprises with the required technological and infrastructural upgradations. According to the Act, the classification of enterprises that are eligible for the MSMED Act benefits are as follows:

The enterprises that fall under any of the categories mentioned above are required to procure an MSME registration. An important point to note is that, before the MSMED Act was introduced, registering a firm was not mandatory. With the introduction of this Act, any firm that wants to avail its benefits such as lower rates of interest, power tariff subsidies, tax subsidies, excise exemption scheme, capital investment subsidies, etc. needs to obtain an MSME registration, thereby enabling maintenance of records. A salient feature of the Act is that it cuts down the unnecessary bureaucracy and red tapes Indian businesses are used to. This makes the process faster and seamless. This helps firms in the MSME sector to operate in a relatively free environment sans the intervention of governments.

Since the introduction of the Act, this sector has contributed to 10% of India’s GDP. It has also generated jobs for many in rural India and helping them become self-sufficient and enabling skills training. This thereby translated into utilization of local resources which then contributed to increased exports.

The advent of the Act has brought about a significant increase in productivity but is yet to pick up its pace in exports. However, with increased globalization comes easy access to global markets. Recently, the Federation of Indian Export Organizations (FIEO) announced that small and medium-sized enterprises (SMEs) will have free access to certain market zones so as to facilitate entry into the African and European markets. This much-needed move will encourage SME’s to explore the export industry with more fervour.

On the flip side, there still seems to be some disconnect in the implementation of the MSMED Act. MSME’s fall under Priority Sector wherein banks are required to lend at least 40% of their total portfolio. As the investment range has grown, smaller units have been sidelined due to overcrowding of the investment range since small and medium enterprises are clubbed together. These small enterprises pay a heavy price because they are not eligible to raise funds in the stock market unless their net worth is over ₹100 million.

Another area that the MSMED Act nearly missed out on is women entrepreneurs in the MSME sector. There is an urgent need for a reform in the Act wherein women entrepreneurs get some sort of a leverage like a reservation in infrastructural or procurement policies. Currently, the Act has a scheme running for women in the coir industry alone; this needs to be extended to other industries as well.

There is no doubt that the MSMED Act of 2006 has been a step in the right direction. It has also helped casteism-ridden India’s, “lower class”, get an equal opportunity to run successful businesses. The potential of this sector is tremendous. However, the time has come to reform the Act and take into account the learnings of the past decade to further improve the MSME sector.

To read about the role of Indian SMEs in Economic Development, click here.