1. Prologue
  2. [Act 1] MSME Basics
    1. Definition: MSME sector
    2. Definition: Cottage vs Village industry
    3. Definition: organized vs unorganized sector
    4. Problems of these industries:
  3. [Act 2] MSME – Government initiatives
    1. Public procurement policy
    2. SIDBI, SIDF and NEF
    3. Taxation, Subsidy, Schemes for MSME
    4. Items reserved for MSME sector
    5. Budget 2014: MSME related announcements
    6. Budget-Textiles / handloom related
  4. [Act 3] Sick industries
    1. IIFB (closed)
  5. [Act 4] Survey Summary: MSME reforms


Economic survey chapter 9. Industrial Performance. Three subparts

  • Companies act and corporate governance
  • Policies, PSUs, excise and custom duties
  • MSME sector

[Act 1] MSME Basics

cover Economic Survey MSME industry

Definition: MSME sector

  • Initial classification based on Abid Hussain committee.
  • Latest classification based on MSME Act 2006
Classification Mfg. Sector Service Sector
criteria investment in plant and machinery equipment
MICRO upto 25 lakhs upto 10 lakhs
SMALL >25 lakhs >10
  • >5 cr.
  • Upper limit 10 cr. (proposal to raise it to 20 crores)
  • >2 cr.
  • upper limit 5 cr.
distribution 32% of MSME are in mfg. sector 68% of MSME are in service sector
  • >55% of MSME located in rural area
  • have shown consistent growth above 10% since 2010

Definition: Cottage vs Village industry

Cottage industry village industry
  • family members managing it
  • no hired employee.
  • negligible capital investment
  • Handmade production using their own tools and material.
  • in area below 10,000 population
  • less than Rs.15,000 capital investment (per worker)

Definition: organized vs unorganized sector

unorganized sector india

Organized sector unorganized sector
~17% of workforce here ~83% workforce here. (NSSO-2011)
establishments which are covered by

  1. Factories Act, 1948
  2. Shops and Commercial Establishments Acts of State Governments,
  3. Industrial Employment Standing Orders Act, 1946 etc.
not covered under those acts/orders
workers get social security benefits- EPF, maternity benefit etc.
  • as such they don’t get.
  • but 2008: Government enacted Unorganized Workers Social Security Act 2008
  • under this act, Social security boards setup at national and state levels.
  • 2010: Swavalamban scheme- Government makes contribution in NPS account of unorganized laborers.
permanent employment (in most cases)
  • casual labor. high mobility, lower bargaining power
  • don’t get protection by trade unions

Problems of these industries:

Common to MSME, cottage and village industries

  • Value addition to raw material is very low – because they lack technology and skilled manpower.
  • Small size = no economies of scale = high cost of operations, transport and raw material. Hence MRP wise cannot compete with MNCs. e.g. Tide washing powder (P&G) vs. some small scale detergent company
  • Electricity supply, market connectivity poor.

We’ve learned the definition and problems of MSME, now let’s check Government initiatives to help them

[Act 2] MSME – Government initiatives

Public procurement policy

applicable from 2012- for three years.
applies to every central ministry, department and PSU
annual target 20% of their total purchase from MSME sector
SC/ST within those 20%, 4% procurement from MSME owned by SC/ST entreprenurs.


  • one of the four All Indian financial institution (other three are NABARD, EXIM and NHB)
  • Owned by consortium of SBI, LIC, IDBI and other public sector financial intermediaries.
  • setup in ‘89, administers SIDF and NEF
  • small industries Development fund (SIDF)
  • under SIDBI
  • when foreign banks less than 20 branches, cannot meet RBI’s Priority sector lending target (PSL), they’ve to contribute money to this fund
  • money used for refinance, expansion; rehabilitation of sick industries etc.
  • National equity fund
  • Purchases “shares” of small industries.
  • So in a way they provide easy money/capital/finance to the company.
  • Because in shares/equities- the company will have to repay “dividend” only if it makes profit, unlike the bank loans.

Taxation, Subsidy, Schemes for MSME

List not exhaustive
Excise Duty MSME upto Rs. 1.5 crore turnover are exempted from Excise duty payment
Service Tax doesn’t apply, if firm selling services less than Rs.10 lakh in the given year.
Capital Subsidy upto Rs.15 lakh for purchasing plant and machinery
India Inclusive Innovation Fund to promote grassroot innovations related social sector- health, education, rural Development etc.
VC for SC Venture capital fund for Schedule caste entreprenurs. managed by IFCI [Industrial Finance Corporation of India]
  • Rajiv Gandhi udhyami mistra yojana
  • Helps getting NOC, legal compliance, capital, training, plants-machinery-technology etc. to startup entrepreneurs.
  • thus saves the new players from redtape and harassment
  • runs helpline
Credit guarantee
  • Up to 1 crore loans to Small scale industry- without any collateral/mortgage.
  • bank gives the loan, MSME ministry takes the “Guarantee” that given businessman will repay the loan, else we’ll repay.
  • This increases banker’s confidence = hassle free loans to small businessmen.
marketing assistance provides information, workshops to connect buyers with manufactures
SIDO Small scale industries Development organization – provide research, training, technical assistance to those entrepreneurs
Cluster MSE- cluster Development program – it’s similar to giving common support infrastructure in SEZ and mega food parks.
Khadi board Khadi and Village Industries Commission, statutory body under MSME ministry
Coir board statutory body under MSME ministry.
nationalawards for entrepreneurs in 3 categories

  1. MSME
  2. Khadi and village
  3. coir
Reserveditems only Micro and small enterprises allowed to produce 20  items.

Items reserved for MSME sector

  • Pickles & chutneys
  • Bread
  • two edible oils (without solvent extraction) -Mustard oil, Ground nut oil
  • Wooden furniture and fixtures
  • Exercise books and registers
  • Wax candles
  • Laundry soap
  • Safety matches
  • Fire works
  • Agarbatties
  • Glass bangles
  • Steel almirah
  • Rolling shutters
  • Steel chairs, tables, furniture
  • Padlocks
  • utensils- stainless steel, aluminum
  • if a non-small scale industry wants to launch above products, they’ve get license + must export 50% of annual production.
  • Exempted: Companies in SEZ and Export processing zone (EPZ).

Budget 2014: MSME related announcements

  • Entrepreneur friendly legal bankruptcy framework will also be developed for SMEs to enable easy exit.
  • SCs, STs and OBCs own majority of MSME enterprises.
  • Therefore, Government will setup a committee on how to provide easier finance to MSME.
  • This Committee will have members from Finance Ministry, Ministry of MSME, RBI to give concrete suggestions in three months.
  • Related topic: in 2013, Government had setup R.S. Gujaral committee to boost MSME exports.
  • District level Incubation and Accelerator Program”
  • Incubation of new ideas and providing necessary support for accelerating entrepreneurship.
MSME definition Ceiling will be raised so more industries can be brought under it.
Startup companies
  • Venture capital fund in MSME sector
  • 10k crore
  • To provide soft loans and capital for start-up companies
technology centre network  to promote innovation, entrepreneurship and agro-industry (200 cr)
MoU (not in budget but under Modi regime)

  • Flipkart Karigaar Ke Dwaar – to provide artisans sell their products on flipkart.com
  • Tata sons made knowledge partner of MSME ministry
  • Raymond will give tranining for men’s garments mfg.

Budget-Textiles / handloom related

Will setup Textile mega-clusters in following places (200 cr):

  1. Varanasi
  2. Bareily
  3. Lucknow
  4. Surat
  1. Kuttch
  2. Bhagalpur
  3. Mysore
  4. Tamil Nadu

Budget 2014: Misc. announcements
Hastkala Academy
  • At delhi (30 cr)
  • For handloom, handicraft sector- will preserve and promote them.
  • Pashmina Promotion Programme (P-3)  in J&K. (50 cr)
  • Crafts Museum
  • Trade Facilitation Centre

Textile Misc. Factoids:

  • Textile export ranking: China > EU > India (3rd)
  • 4.5 crore employed, majority in unorganized sector.

[Act 3] Sick industries

1987: Sick industrial companies Act, based on Tiwari recommendations.

Definition of Sick industry:

  • Does not apply to micro and small enterprises.
  • applies to medium and large scale companies
  • registered under companies act, for minimum 5 years
  • making losses in this year and last year
  • Has eroded its entire networth / paid up capital.

What are the ‘benefits’ of becoming of a SICK company? – well Government provides financial help or help you shut down!

  • BIFR= board for industrial and financial reconstruction
  • statutory body: setup under sick industries act
  • Quasi-judicial body: decides whether a company is sick or not. Its decision is final and binding.
  • if a loss making company is declared “SICK”, it’s given three options
  1. time extension to make net worth positive
  2. “revival” package (from SIDF fund money from SIDBI)
  3. Wind up the company.

IIFB (closed)

  • Industrial investment bank of India
  • Provided finance and technical assistance to revive the “SICK” industries. (after BIFR gave “Certificate” that given company is “SICK”)
  • it was the fifth all India financial intermediary  (AIFI)- other four were SIDBI, NHB, NABARD and EXIM bank
  • 2012: finance ministry closed it down because hardly any positive impact.

[Act 4] Survey Summary: MSME reforms

# E-governance

  1. Create a website with all the rules and regulations applicable to businesses across states and the centre.
  2. Department of industrial Policy and Promotion (DIPP) implement “E-biz” module under National E-governance plan. We can utilized it for this purpose
  3. Minimize human interaction. Shift reporting/data submission to an online-only mode whenever possible, e.g. for routine registration, repeated filing and reporting of information.
  4. Ask State Governments to share best practices on business regulations- and adopt it at national level.

# less interference

  1. Strengthen grievance redressal mechanisms against inspections- with clear norms and deadlines.
  2. Give extension time to companies, to correct their fault instead of penalizing them immediately.
  3. System for self-certification and third-party certification.
  4. Review and remove outdated regulations
  5. Reform the Apprenticeships Act of 1961.
  6. Amend MSME act to help financially distressed companies
  7. Long term: completely revamp Indian laws governing taxation, labour, environment, and safety.
  8. Setup a productivity commission similar to Australian Productivity Commission. It’ll serve a knowledge base, and champion for business change.

# Land availability

  1. Permit mixed use of residential and commercial properties. Otherwise, given the real estate inflation- the MSME entreprenurs cannot expand.
  2. Ask PSUs and departments to sell away their “Surplus / unutilized” land to MSME. The government could institute a ‘use it or lose it’ policy to free up this locked land.

#social security

  1. Give wider social security and health benefits like New Pension Scheme (NPS) and Rashtriya Swasthya Bima Yojna (RSBY).
  2. Coupon system for casual workers- which grants them social security benefits.