“A Good intention with a bad approach often leads to a poor result”. Covid has impacted almost all the sectors of the economy but the micro, small and medium enterprises (MSME) seem to be the worst affected. Various survey reports estimate the loss in revenue for this sector to the tune of 30-50 per cent and given their fragile scale and vulnerable position, the damage is serious.

The government’s helping hand through initiatives like bank guarantees, loan moratoriums, etc. have provided some relief but they are far from adequate. In continuing with the reform agenda, the MSME Ministry has introduced a new scheme “UDYAM” to improve access to assisted schemes; however, has the Ministry shot itself at its feet with UDYAM?

MSME, a vital sector

To begin with, India is touted as the land of MSMEs, not without reason — we have one MSME for every 21 citizens (6.34 crore MSMEs), of which a significantly large number (99.4 per cent) are micro enterprises (less than ₹5 crore of turnover and ₹1 crore of investment). MSMEs are the backbone of our country contributing enormously to distribution of products, services, employment and consequently wealth.

More than half (51.4 per cent) are from rural India with activities spanning across manufacturing (31 per cent), trading (36 per cent) and other services (33 per cent). A fifth of the MSMEs are run by women entrepreneurs and in all they provide over 100 million jobs.

Access to organised finance has been difficult for the sector and nearly two-thirds of MSME loans are from informal sources. Since nationalisation of banks in 1969, the thrust towards priority sector lending (MSME included) has been implemented with diligence. Banks need to lend 40 per cent of their net credit exposure towards priority sector loans (PSL). Further PSL commands benign regulatory requirements thereby reducing the cost of borrowing by a good 2-3 per cent.

The sops

The MSME Development Act was introduced to facilitate the development and enhance competitiveness of MSMEs. Subsequent to this, various enabling regulations like amendment to income tax forms, GST concessions, banking norms, etc were introduced to foster their growth.

Availability of quality data has been a serious constraint affecting targeted welfare measures. To promote identification and access to various schemes of MSMEs, the Udyog Aadhaar Memorandum (UAM) was introduced and more than 8.6 million (as of January 2020) units were registered under the scheme. However, in July 2020, the UAM was substituted by UDYAM.

UDYAM is an “online only” registration which provides for classification of units engaged in manufacturing and service sector into Micro Small Medium Enterprises based on investment and turnover. The scheme links both income tax and GST returns for assessing eligible turnover and investment criteria.

A recent notification by the Ministry, dated June 26, 2020, makes investment and turnover criterion, beyond the first year, determinable based on tax filings (both income tax and GST) in lieu of self-declaration. As of October, 2020, over a million units have registered under UDYAM (37 per cent manufacturing and 63 per cent services).

Further, the RBI, in a notification dated August 21, 2020, has made it mandatory for MSMEs to be registered under the UDYAM scheme to be eligible for PSL, by March 31, 2021.

The pain points

While the intent behind the scheme and the resulting notifications are laudable, it has some glaring concerns:

* Traders have been excluded from the purview of MSME definition, consequently eliminating nearly 2.3 crore entities (36 per cent) from the landscape. Scheduled commercial banks had sanctioned limits of nearly ₹11.5 lakh crore to 1.25 crore traders (wholesale and retail) (March 18), all these limits would now have to be reviewed in terms of pricing and eligibility in the absence of PSL tag.

Further, banks may not be inclined to lend small ticket loans to traders citing commercial reasons affecting financial inclusion and forcing the traders to resort to high-cost informal borrowings. Traders constitute nearly 36 per cent of all MSMEs and have a 35 per cent share in employment generation. The move could affect nearly 39 million jobs (45 per cent from rural) in this sector. The Ministry has subsequently agreed to include wholesale and retail sale and repair of motor vehicles, constituting a small fraction of the trader universe, within the purview, though an official notification is yet to be released.

* The notification mandates MSMEs to file tax returns even though they may not otherwise be required to file under the respective fiscal laws. In a country where nearly 99.4 per cent of MSMEs are micro enterprises and just a small percentage of the population actually paying taxes, this expectation seems far fetched.

* Registration under the UDYAM scheme is entirely online, and in a country where nearly half the population lack access to internet and more than half of the MSMEs (51.4 per cent) located in rural areas, this expectation seems stretched. Further, the time limit for registration is pegged at March 31, 2021 for PSL tag which seems extremely tight given our infrastructure constraints. The move could effectively push MSMEs to rely on informal sources of financing thereby plunging them into a debt trap.

Collection of data for expansion of access to welfare schemes is an important requirement for eradicating inequality in distribution of income and wealth; however, it should not come at the cost of practicality or undue hardship especially in a year of pandemic. Policy initiatives with a forward-looking approach are the need of the hour, but the same needs to be done after putting in the desired infrastructure in place.

We hope, given the magnitude of the issue, the government expands the definition of MSME to include traders, accepts self-declaration (in lieu of tax returns) and makes the registration mandatory over a 24-36 month period to make the transition smooth and seamless. After all, “the best public policy is made when you are listening to people who are going to be impacted”.

The writer is Founder and Managing Partner – DVS Advisors LLP