Four years after excluding retail and wholesale businesses from the micro, small and medium enterprises (MSME) segment, the government has recently reinstated such trades in the category, making entities eligible for priority sector funding and a unique liquidity scheme from banks. As per the Ministry of Micro, Small and Medium Enterprises, the move is set to benefit 2.5 crore enterprises that function in retail and wholesale.
But, before getting into the current definition of MSMEs and what benefits will the businesses get now, let us first understand when and why wholesale and retail trades were removed as MSMEs.
When were retail and wholesale businesses excluded as MSMEs?
According to the current definition of MSMEs, only manufacturing and service sector businesses qualify as MSMEs. In 2017, the government announced that retailers and wholesalers would no longer be classified as MSMEs.
The Micro, Small & Medium Enterprises Development (MSMED) Act, passed by the government in 2006, defined small business businesses as function in the “manufacturing and service sectors”.
Why were these businesses excluded four years ago?
The MSMED Act included retail and wholesale companies in the definition of MSMEs under the 2006 Act. But the centre removed them from the list in 2017 because, according to the government, no retail and wholesale trade directly involves manufacturing or service aspects of the business. Now, after four years in 2021, the Union government has issued new guidelines to reinstate the retail and wholesale trades as MSMEs.
What does ‘reinstating retail and wholesale traders under MSME’ actually mean?
The inclusion of these trades as MSMEs means that businesses in this sector, left out from the benefits available for MSMEs, will now have access to them. Under the revised guidelines, the government will include retail and wholesale trades in MSME categorisation. This will extend the benefit of priority sector lending to them.
What benefits will the retail and wholesale businesses get as MSMEs?
Many government schemes support MSMEs to make it easier for them to access resources. The government even set up a unique loan programme for MSMEs to help tackle the effects of the COVID-19 pandemic. As a result of the recent inclusion plans, wholesalers and retailers will be able to benefit from these schemes.
A great benefit that retail and wholesale traders can now reap is priority sector lending (PSL). Loans to the MSME sector are included in the priority sector lending. Retailers and wholesalers will now have access to this credit loan priority.
They can now also get access to the Udyam registration portal. Udyam was launched last July and is a free and paperless platform for self-promotion that enables new and existing MSMEs to register simply with Aadhaar numbers.
A move towards the sector’s formalisation
Businesses that gain the MSME status by registering on the government portal are entitled to several benefits, ranging from interest subsidies on bank loans to direct tax relief and credit relief. About 2.5 crore wholesalers and retailers are expected to benefit from the government’s decision to bring them back as MSMEs.
According to the National Sample Survey 73rd Round (2015-2016), there are approximately 2.5 crore MSMEs in India. Uttar Pradesh reportedly has the most SMEs with 90 lakh companies, followed by West Bengal with 88.7 lakh such enterprises.
With around 11 million employees, the MSME sector is the second-largest producer of jobs in India after agriculture. It contributes 30% to the national GDP and accounts for 48% of exports. The inclusion of retail and wholesale encourages the formalisation of this sector through policy-driven change led by small businesses, government assistance and funds access.
Suggested plan and next steps for MSMEs
The new members of the government-recognised MSME sector will now have access to numerous government schemes designed for such businesses. The disruption by COVID-19 has left all sorts of firms scrambling for resources. Now, companies from the retail and wholesale segments, including the small Kirana shops and micro-retail outlets from small towns, can apply for government aid in times of financial hardship.
Along with the existing MSME entities like manufacturers, service providers, exporters, ancillaries, retail and wholesale businesses can now have access to a new formal network in addition to the recent financial avenues. The government also recently increased the corpus of the Emergency Credit Line Guarantee Scheme (ECLGS) scheme to Rs. 4.5 lakh crore. Retail and wholesale businesses can apply to this credit scheme and avail some liquidity benefits to keep going in the uncertain times worsened by pandemic challenges.