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ABOUT THE STUDY
Aims and Objectives
o Post- New Industrial Policy (1991) scenario: the
missing boom in the MSME sector- WHY?
o Comparative Evaluation: Business and Regulatory
Environment
Methodology
o Secondary Data Analysis
ABOUT THE STUDY
Research Question
o What have been the causes behind the inability
of MSMEs to realise their growth potential?
Hypothesis
o Given business environment; disparate growth…
Regulatory norms
serve as barriersBusiness environment:
non-conducive
LAYOUT OF THE PAPER/ PRESENTATION
o Introduction
o MSMEs v. Large Scale Industries
o Regulatory Norms
o International Comparison: EoDB Index
o Policy Recommendations
DEFINITION
• Basis: investment ceiling.
• Shift: SSIs MSMES: positive shift in policy
perspective and focus. Objective of the MSMED
Act, 2006?
Industry Enterprises engaged in the
manufacture of production
of goods: investment in
plant and machinery
Enterprises engaged in
providing or rendering of
services: investment in
equipment.
Micro Not exceeding Rs. 25 lakh. Not exceeding Rs.10 lakh
Small Between Rs. 25 Lakh and Rs.
5 crore
Between Rs.10 lakh and Rs.2
crore.
Medium Between Rs. 5 crore and Rs.
10 crore.
Between Rs. 2 crore and Rs. 5
crore.
CHALLENGES
Significance of study?
• Poor infrastructure
• Finance: lack of adequate and
timely access
• Marketing
• Regulatory norms: 142nd on the
EoDB
• Tax structure: number of
payments, procedure
• Lack of information flow
• Innovation/ R&D: missing
• Labour: Availability of skilled
and productive force
• Corruption
• Lumping MSMEs together:
POLICY PERSPECTIVE
CHALLENGE.
LARGE v. SMALL ENTERPRISES: POST 1991
What does liberalisation do?
o Access to capital/ technology + freedom to invest in
domestic industries = increased competition, creative
destruction/ innovation.
o Factors get reallocated as per productivity, with
inefficient firms driving out the inefficient ones- leads to
increased overall productivity and growth in the
economy.
LARGE v. SMALL ENTERPRISES: POST 1991
What did liberalisation do for MSMEs?
• Total working MSME units: 105.21 lakh (2001-02) v.
447.73 lakh (2011-12).
• Alteration in institutional arrangement: dereservation of
products for MSMEs; increased competition with the
large scale sector.
• Induction into a competitive environment proved too
sudden for MSMEs (given lack of capital, marketing
opportunities, innovation, skilled workforce); OUTCOME:
Sick units: 0.2 million (1990) v. 0.3 million (2000)/ Rate of
exports: 31% to 18%.
Comparative
Overview:
How the 1991
reforms treated and
impacted
SSIs/MSMEs vis-à-vis
Large Scale
Industries.
Years Factories (%
growth rate)
Employees
(% growth
rate)
Gross
Output (%
growth rate)
SSI Large SSI Large SSI Large
1980-81
to 1984-
85
-0.6 11.9 -2.1 2.1 0.6 8.7
1985-86
to 1990-
91
0.7 15.0 1.5 0.5 7.9 9.6
1980-81
to 1990-
91
0.2 13.7 0.1 1.1 5.0 9.3
DOCUMENTATION AND ANALYSIS OF
REGULATORY NORMS
Entry Continuance Exit
ENTRY
Registration
• PROCESS: S. 8(1), MSMED Act. Optional. Manufacturing: Memorandum of
Registration is mandatory.
• ADVANTAGE: Registration ensures the minimum financial interest of the seller
(the MSME owner)- that is, the price for his goods.
Licensing
• Licensing Exemption Notification (1991) under the IDR Act, 1951: no industrial
license required except in case of 6 product groups included in the compulsory
licensing group.
• Item groups reserved for exclusive manufacture by MSMEs.
PROCEDURAL NORMS (ENTRY)
• More significant than statutory stipulations in
terms of the hindrance they can potentially
pose: tedious and protracted nature.
• Starting a business: 11 associated procedures
(Delhi); 13 (Mumbai).
• Acquiring a construction permit: 27 steps/
procedures.
• Registering property (for the purpose of use as
a warehouse, for instance): 7 steps/ procedures.
ANALYSIS OF NORMS (ENTRY)
• Simplification of the registration process;
• Statutory protection to the financial interest of
the MSME owner;
• Minimal licensing obligations;
• Procedural barriers.
CONTINUANCE
Financing
• Outstanding credit gap (beginning of the 12th
plan period): 62% of the credit demand; total
credit demand for micro enterprises = INR 7.9
trillion (2012)!
• Availability of bank credit is low; credit to
MSMEs as a % of NBC: 14.6% (2000) to 8%
(2007).
• Master circular, RBI (2010): guidelines for
lending to MSMEs; targets?; specialised
branches.
CONTINUANCE
• High credit cost: reported to be an impediment
by 80% of MSME owners (ET).
• Credit Rating of MSMEs: significance? Role of
governmental policy: SMERA.
• FDI into an MSME: ceiling of 24% for equity
participation lifted with the MSMED Act: subject
only to sectoral caps and regulations now.
• Ease of getting credit in India: 36th position/ 189
countries on the EoDB.
CONTINUANCE
Labour
• Concurrent List subject- 44 central enactments:
industrial relations, industrial safety and health,
child and women labour, social security, labour
welfare, employment and training, wages,
others.: irrelevant to the MSME sector.
• Lack of skilled labour.
CONTINUANCE
Taxation
• Concerns: Number of payments, long
procedure, non-uniformity across states (World
Bank): 33 annual tax payments; 243 hours/ year
spent in filing; tax payment amounts to 61.7% of
profit. India = 156th of 189 countries.
Tax Benefits, Schemes and Incentives for the
MSME Sector
• Deduction in respect of profit and gains:
ambiguity as to definition of SSIs
• Excise exemption
• Presumptive taxation
ANALYSIS OF NORMS (CONTINUANCE)
• Increasing availability of credit: positive role of
the RBI
• Betterment in FDI policy towards MSMEs
• Balancing labour interests with regulatory
framework: avoiding ‘over-legislation’
• Redundancy/ Inapplicability of labour laws
• Protracted procedure for tax payments
• Ambiguity as to definition of SSIs for tax
purposes
EXIT
• Section 25, MSMED Act: required the central
government to prescribe a winding up scheme/
closing down procedure: no legal framework till
date: implication- wastage of human, capital
and physical resource.
• SICKNESS (associated with exit): “Erosion in the
net worth due to accumulated losses to the
extent of 50% of its net worth”.
• Causes of sickness: lack of demand; shortage of
working capital; non-availability of raw material;
power shortage; labour, marketing, equipment
and management problems.
EXIT
• Revival of sick units- not a priority for banks-
conflicting interests.
• Presidency Towns Insolvency Act (1909)/
Provisional Insolvency Act (1920): disregard the
concept of limited liability; focus of litigation:
reovering statutory dues; not revival of the
MSME unit. LLP Act, 2008.
ANALYSIS OF NORMS (EXIT)
• Rehabilitation and resolving insolvency
measures to be aimed at revival
• Legal framework for exit
INTERNATIONAL COMPARISON
How does the EoDB Index
work?
o A composite of 2 measures:
• DTF Score
• EoDB Ranking
Indicators
• Starting a Business
• Construction Permits
• Getting Electricity
• Registering Property
• Getting Credit
• Protecting Minority
Investors
• Paying Taxes
• Trading Across Borders
• Resolving Insolvency
EoDB: Business
Environment in
India
Comparison with
China, Russia,
Bangladesh
Relevance of the EoDB for MSMEs
A comprehensive measure of how easy/
difficult it is for a local entrepreneur to
open and run a small to medium-sized
enterprise when complying with relevant
regulations.
Where does India Stand?
5
5
2
3
1
1
5
2
4
3
DB TOPIC/
PARAMETER
DB RANK
2015/2014
ALONG THE
TOPIC
DISTANCE TO
FRONTIER
SCORES
2015/2014
Starting a Business 158/ 156 (-2) 68.4/ 65.54
(+2.88)
Dealing with
Construction
Permits
184/183 (-1) 30.89/ 29.70
(+1.19)
Getting Electricity 137/ 134 (-3) 63.06/ 62.55
(+0.51)
Registering
Property
121/115 (-6) 60.40/ 60.40 (-)
Getting Credit 36/ 30 (-6) 65.00/ 65.00 (-)
Protecting
Minority Investors
7/ 21 (+14) 72.50/ 65.83
(+6.67)
Paying Taxes 156/ 154 (-2) 55.53/ 55.64 (-
0.11)
Trading Across
Borders
126/ 122 (-4) 65.47/ 64.89
(+0.58)
Enforcing
Contracts
186/ 18 (-) 25.81/ 25.81 (-)
Resolving
Insolvency
137/ 135 (-2) 32.60/ 32.43
(+0.17)
POLICY RECOMMENDATIONS
Drawing up a distinction
between micro, small and
medium enterprises at a policy
level
Starting a business:
minimisation of procedural
compliances required
Better monitoring mechanism
with respect to finance for
MSMEs
Simplification of labour
regulatory framework
Inclusive method of
checking compliance
with regulatory norms
Taxation: Need for
simpler procedure and
non-ambiguity in laws
Addressing lack of
awareness
Legal framework for an
exit scheme