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Micro, Small and Medium Enterprises development act 2006 and amendment 2020

Introduction

The MSME sector plays a pivotal role in India’s economy, contributing significantly to employment generation, exports, and regional development. To formalize and support this sector, the Government of India enacted the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006. This legislation sought to address the unique challenges faced by MSMEs, including financial constraints, lack of infrastructure, limited market access, and skill development needs.

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Objectives of the MSMED Act, 2006

The primary objectives of the MSMED Act, 2006, are:

  • Classification and Registration: Clearly defining the categories of micro, small, and medium enterprises based on investment criteria.
  • Promotion and Development: Creating a conducive environment for MSMEs to thrive, by implementing policies aimed at their promotion, development, and competitiveness.
  • Addressing Delayed Payments: Establishing guidelines to mitigate the common issue of delayed payments to MSMEs, a critical obstacle to their growth.
  • Skill Development and Technology Upgradation: Supporting skill-building initiatives and technology upgradation to improve productivity and competitiveness.
  • Market Assistance: Facilitating access to domestic and global markets, and creating platforms for MSMEs to showcase their products and services.

Key Provisions of the MSMED Act, 2006

  • Definition and Classification of MSMEs: The Act defined MSMEs based on investment in plant and machinery or equipment. Initially, micro, small, and medium enterprises were classified as:
    • Micro Enterprises: Investment up to ₹25 lakhs.
    • Small Enterprises: Investment up to ₹5 crores.
    • Medium Enterprises: Investment up to ₹10 crores.
  • Delayed Payments to MSMEs: The Act introduced measures to address delayed payments. If an MSME supplier was not paid within 45 days of delivering goods or services, the buyer was liable to pay a compounded interest.
  • Credit Facilities and Subsidies: Banks and financial institutions were encouraged to provide credit facilities to MSMEs at favorable terms. The government introduced credit-linked capital subsidies to support the adoption of modern technology and expansion efforts.
  • Cluster Development Programme (CDP): The Act promoted the development of MSME clusters, which are geographical concentrations of MSMEs that produce similar products. The CDP focused on strengthening infrastructure, skill development, and market access within these clusters.

Impact of the MSMED Act, 2006

The Act had a significant impact on the MSME sector in India:

  • Increased Credit Flow: Access to credit improved, with banks and financial institutions incentivized to extend credit to MSMEs.
  • Enhanced Competitiveness: Through subsidies, market linkages, and technology upgradation, MSMEs became more competitive, both domestically and internationally.
  • Increased Formalization: The Act helped to formalize many small businesses by encouraging them to register as MSMEs, granting them access to benefits such as government subsidies, easier credit access, and protection against delayed payments.

Need for the Amendment

Despite the positive impact of the MSMED Act, 2006, several challenges remained. The COVID-19 pandemic highlighted the vulnerabilities of MSMEs, especially in terms of liquidity, access to markets, and overall resilience. The MSME sector needed a structural boost to survive and grow in the evolving economic scenario. In 2020, the Government of India introduced critical amendments to the Act as part of the “Atmanirbhar Bharat” (Self-Reliant India) campaign.

Key Changes in the 2020 Amendment

A. Revised Definition of MSMEs
  • The 2020 amendment redefined MSMEs, expanding the investment limits and adding an annual turnover criterion to make the classification more inclusive and reflective of business capacities.
  • New Criteria:
    • Micro Enterprises: Investment up to ₹1 crore and turnover up to ₹5 crores.
    • Small Enterprises: Investment up to ₹10 crores and turnover up to ₹50 crores.
    • Medium Enterprises: Investment up to ₹50 crores and turnover up to ₹250 crores.
  • Impact: The new definition allowed more enterprises to fall within the MSME category, providing them access to various government incentives and benefits, thereby boosting the sector’s competitiveness and growth.
B. “Udyam Registration” Portal
  • The government launched the “Udyam Registration” portal for a seamless and digital registration process, making it simpler for MSMEs to register and access government benefits. The new process is entirely paperless and based on self-declaration, which reduces the compliance burden for small business owners.
  • Impact: This initiative accelerated the formalization of MSMEs, making it easier for them to obtain loans, subsidies, and market access.
C. Emergency Credit Line Guarantee Scheme (ECLGS)
  • The ECLGS was introduced to offer emergency credit support to MSMEs severely affected by the COVID-19 crisis. This scheme provided collateral-free loans with a 100% government guarantee, ensuring that MSMEs had access to liquidity during challenging times.
  • Impact: The scheme provided a critical financial lifeline to MSMEs, helping them maintain operations and preserve jobs amid the pandemic.

Comparison of the 2006 Act and 2020 Amendment

AspectMSMED Act, 2006MSMED Act, 2020 Amendment
Definition of MSMEsBased solely on investmentInvestment + Annual Turnover
Registration ProcessPaper-based and bureaucraticUdyam Registration, digital, self-declaration
Credit SupportSubsidized credit and capitalECLGS for liquidity support
FormalizationIncentives to register as MSMEsDigital platform encourages more formal registration

Impact of the 2020 Amendment on the MSME Sector

  • Enhanced Growth and Competitiveness: By including more businesses within the MSME category, the 2020 amendment allowed these enterprises to benefit from government schemes, facilitating growth and enhancing competitiveness.
  • Increased Ease of Doing Business: The simplified registration process on the Udyam Portal reduced bureaucratic hurdles, promoting ease of doing business.
  • Greater Financial Resilience: The introduction of the ECLGS and similar schemes provided MSMEs with the financial backing to withstand economic downturns, ensuring business continuity during crises like the COVID-19 pandemic.

Challenges and Criticisms of the 2020 Amendment

  • Need for Better Implementation: Although the 2020 amendment created a supportive framework, implementation challenges remained, especially in terms of awareness and digital literacy among MSME owners in rural areas.
  • Credit Availability: Despite the introduction of ECLGS, the overall credit gap for MSMEs persists, with many small enterprises facing difficulties in accessing formal financial channels.
  • Delayed Payments Issue: Although the Act addresses delayed payments, MSMEs still face this problem from large corporations and government entities, impacting their liquidity.

Conclusion

The MSMED Act, 2006, and its 2020 amendment have played a vital role in promoting the MSME sector in India. While the 2006 Act laid the foundation, the 2020 amendment provided a much-needed update, making the MSME classification more inclusive and responsive to the changing business landscape. By fostering a supportive environment, the legislation has empowered millions of MSMEs to contribute to India’s economic growth. For UPSC aspirants, understanding the Act’s historical context, objectives, and evolving provisions offers valuable insights into India’s economic policies and their role in inclusive growth.

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