The new MSMED Act can do more by providing SMEs with the most powerful tool: Regional information, data and value-added knowledge.

Manasi Phadke

After hanging fire in Parliament for over a year, the SMED Bill morphed into the Micro, Small and Medium Enterprises Development (MSMED) Act on June 16, 2006. Its passing raised quite a cheer from industry; it is, after all, a piece of legislation that will impact the future of more than 12 million small units, employing about 30 million people. According to a recent notification, the Act will come into force from October 2.The most relevant feature of the Act is that the definition of Micro, Small and Medium Enterprises has been changed. The Government classifies industries based on the investment in plant and machinery and not on turnover or employment, as is the case elsewhere.

For example, a manufacturing unit with a total investment in plant and machinery of less than Rs 1 crore but more than Rs 25 lakh is now classified as a Small Scale Industry (SSI); the new Act increases the upper limit to Rs 5 crore. This ensures that the definitions are time-relevant and also enables slightly bigger industries to reap the benefits that only smaller units used to enjoy.

SSI benefits

The new limits will apply from the date the Act comes into force. While the industries are obviously eyeing the potential benefits, the move is also going to cause some bureaucratic hassles. For example, a unit with investment in plant and machinery of Rs 1-5 crore will no longer be classified a medium-scale unit but as a small-scale one. It will have to re-register itself as an SSI. This is to be done within 180 days of the commencement of the Act voluntarily "at its discretion", as per the new MSMED Act notification. However, many of the benefits or incentives available to the SSI units depend on the SSI registration certificate being produced. For example, to be eligible for some of SIDBI's schemes, such as the Credit Linked Capital Subsidy Scheme, or to get membership of the National Small Industries Corporation (NSIC), registration is a must.

Further, many of the State-level incentive schemes are SSI-sensitive. Under the erstwhile Package Scheme of Incentives in Maharashtra, for instance, SSI units set up in less industrialised zones were given special stamp and octroi benefits, concessions on electricity billing, and so on.

It is not yet clear if the medium-scale units under the new Act are also to be given preferential treatment for credit, tax and other purposes, though the very need for an "SME" Bill rather than an "SSI" one was that the medium-scale units too needed as much policy space as the SSI units.

Thus, all units with investment of Rs 1-5 crore will now be re-registering as SSI units, while those with investment of Rs 5-10 crore will re-register themselves as medium-scale units. The SSI Ministry-controlled District Industries Centres (DIC) will be flooded with registration formalities between October and March. This is an excellent opportunity for the Ministry to build a current, usable database.

Database creation

Data on Indian industrial units are hard to come by, especially at the regional level. That is because such databases are usually created when there is need for a study or a policy change. Instead, systems should be so designed that databases become an automatic output of the day-to-day running of the various ministries. Currently, most DICs have heaps of files of dusty local SSI registrations and there has been little effort to computerise the systems; thus, much of the data collected is useless. Second, the registrations are of two types "provisional" and "permanent". When the unit initially applies for registration, a provisional SSI status is granted it, against which it is possible to raise finances, get pollution control NoCs, and so on. The permanent certificate is given on the unit becoming functional.

These two registrations should actually convey accurate information on how many registered units get around to commencing operations. This rate is normally low and would be 10-20 per cent of the total provisional registrations. This is an important signal of the `early death' syndrome in SSIs. However, there is again no formal calculation of this rate and certainly no case study analysis available with the DICs.

Useful data

While some statistics are available at the national level, they are of little use to actual entrepreneurs wanting to start new activities in a particular region or those looking at expansion plans. Business networks could be national or global, but on-ground issues are mainly local.

While setting up a unit, entrepreneurs want to know which suppliers and clients are immediately available locally. They want data on employment by certain suppliers to gauge the scalability; they want to know the benefits available at the State-level and the Municipal Corporation to local industries. For these small entrepreneurs, the business confidence index or the all-India inflation rate is not as relevant as the local data.

The new MSMED Act seems to have made provisions to safeguard the interests of the SMEs by putting penalty clauses on non-paying buyers, instituting arbitration councils, etc. However, it can do more by providing these SMEs with the most powerful tool: Regional information, data and value-added knowledge. The DICs should be provided necessary funds and training so that they are equipped to handle the new registrations in a way that computerised databases are created even at the initial stage. The new Act coming into being is a wonderful opportunity that the Ministry can cash in on to create a region-wise database of micro, small and medium enterprises. Used well, this is a powerful tool that can be used for analysis and betterment of these industries five years down the line. Letting go the chance to do this, however, will mean just another Act that has changed definitions and created no internal systems for empowering the very industries it purports to serve.

(The author is Economic Advisor, Mahratta Chamber of Commerce, Industries and Agriculture, Pune. She can be reached at manasip@mcciapune.com)

(This article was published in the Business Line print edition dated September 29, 2006)
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