MSME – Basic definitions and concepts

Overview
The Micro, Small and Medium Enterprise sector is crucial to India's economy. There are 63.388
million enterprises in segment, employing close to 110.989 million people. In all, the MSME
sector accounts for 28.77 percent of India's GDP, and 40 percent of exports.

FIGURE 1: BROAD CLASSIFICATION OF MSMEs IN INDIA

MANUFACTURING REGISTERED

MSMEs MSMEs

19.665 million 10.65 million

TOTAL NUMBER OF
MSMEs

SERVICE 63.388 million UNREGISTERED

MSMEs MSMEs
43.723 million 52.738 million

Key definitions
MSMEs are classified based on their investment in plant and machinery for a manufacturing
enterprise or investment in equipment for a service enterprise. This definition was established in
the Micro, Small and Medium Enterprise Development Act (MSMED Act) of 2006.

Growth of MSMEs
Parameter NSS 73rd Round Fourth All India Census Annual Compound
2015-2016 of MSMEs, 2006-07 Growth rate(%)

No. of MSMEs 633.88 361.76 6.43

(Total)

Manufacturing 196.65 115.00 6.14

Services 437.23 246.76 6.56

Employment 1109.89 805.24 3.63

(Total)

Manufacturing 360.42 320.03 1.33

Services 749.47 485.21 4.95

Manufacturing Enterprise – Service Enterprise –

Classification
Turnover Turnover
Micro annual turnover does not exceed INR annual turnover does not exceed INR
50 million 50 million
Small INR 50 million to INR 750 million INR 50 million to INR 750 million

Medium INR 750 million to INR 2500 million INR 750 million to INR 2500 million

MSMED Act, GoI has recently (in February 2018) proposed a revised methodology for
classifying MSMEs; the proposed revision will be placed before parliament for approval.

Classification of MSMEs
1. Registered Vs. Unregistered
Just about 15 percent of the businesses in the sector are registered enterprises – while the
huge balance are all unregistered. In order to encourage registration, the Ministry of Micro,
Small and Medium Enterprises has simplified the registration process, replacing the earlier two-
stage registration process with a one-step filling of the Udyog Aadhar memorandum online. the
Micro, Small and Medium Enterprise Development Act, 2006, does not make it obligatory for a
micro enterprise to register and thus there is no official, accurate database of all such
businesses.
 Registered Enterprises: As defined according to the 4th MSME census(2007), registered
enterprises are :
(i) All enterprises registered/having filed Entrepreneurs Memorandum (EM II) in District
Industries Centers (DICs) in the State/UTs.
(ii) Enterprises registered with KVIC.
(iii) Enterprises registered with Coir Board.
(iv) Factories registered under section 2m(i) and 2m(ii) of the Factories Act, 1948, as per
frame list of Annual Survey of Industries(ASI) to capture units having investment from ` 1
to ` 10 crore) as available with National Sample Survey Office, M/o Statistics and
Programme Implementation as on 31.3.2006.

EM is no longer required.Ministry of MSME has notified a simple one-page registration

form ‘Udyog Aadhaar Memorandum’ (UAM) on 18th September 2015. The simplified
one-page registration form UAM was made after consultations with the states and
stakeholders, on the basis of recommendations made by the Kamath Committee on
Financial Architecture and observations/approvals by Department Related Parliamentary
Standing Committee, National Board for MSME and Advisory Committee for MSME etc.

https://msme.gov.in/sites/default/files/Important%20event%20of%20Ministry%20for%20F
ebruary%202018.pdf
 This is a path breaking step to promote ease-of-doing-business for MSMEs in India as
the UAM replaces the filing of Entrepreneurs’ Memorandum (EM part-I & II) with the
respective States/UTs. The entrepreneurs in the MSME sector just need to file online, a
simple one-page UAM on http://udyogaadhaar.gov.in to instantly get a unique Udyog
Aadhaar Number(UAN).The information sought is on self-certification basis and no
supporting documents are required at the time of online filing of UAM.

MSMEs that file business information such as investment, nature of operations,

manpower with District Industry Centers (now replaced by online registration under
Udyog Aadhaar system) of the State or Union Territory are considered as registered
enterprises. The data on enterprise output and performance is periodically tracked by
the government agencies.

 Unregistered Enterprises: As defined according to the 4th MSME census(2007),

unregistered enterprises are all non agricultural enterprises subject to the definitions as
per MSMED Act, 2006, which were eligible for registration/obtaining EM II as on
31.03.2007 but were not registered/not having filed EM II.
Enterprises whose output performance is not adequately tracked by government
agencies
Size of MSME sector in India (in millions)

70

60 57.298

50

40

30

20

10 6.09

0
Registered Unregistered

2. Organised / Unorganised
The use of the term 'organised' and 'unorganised' as used in India is internationally known as
‘formal' and 'informal'. In the Indian context the enterprise concept (i.e. to define the
unorganised sector) and the employment concept (i.e. to define unorganised employment) lack
in conceptual clarity and uniformity across the sub-sectors of the economy.
The Central Statistical Organisation uses the term organised enterprise as small units with ten
or more workers with power or 20 or more workers without power for the manufacturing sector.
 However, the absence of similar statistical data till now prevented this definition being extended
to the service sector.
Since the 55th Round Employment Survey of the National Sample Survey Organisation
(NSSO), it is possible to apply a uniform definition of both the sector concept and the
employment concept to distinguish the organised/formal from the unorganised/informal. Using
the following two key definitions the Commission separated the unorganised sector from that of
the organised sector as well as unorganised employment from that of organized employment
(NCEUS forthcoming). The organised/unorganised terms are used interchangeably with
formal/informal and as such they are consistent with the international definition as
recommended by the ILO.
"The unorganised sector consists of all unincorporated private enterprises owned by individuals or
households engaged in the sale and production of goods and services operated on a proprietary
or partnership basis and with less than ten total workers".
"Unorganised workers consist of those working in the unorganised enterprises or households,
excluding regular workers with social security benefits, and the workers in the formal sector
without any employment/ social security benefits provided by the employers"

ORGANISED SECTOR UNORGANISED SECTOR

 18.46 % of workforce here.  81.54% of workforce here.

 It is covered by the following acts :  It is not covered under these Acts /

1. Industrial Employment orders.
(Standing orders) Act of 1946
2. Employees Provident Fund
and Miscellaneous Provisions
Act of 1952
3. Industries (Regulation and
Development) Act of 1951
4. Maternity Benefit Act of 1961
5. Payment of Bonus Act of
1965

 Workers get social security benefits
like EPF, maternity benefits, medical
leaves etc.
 They don’t enjoy such benefits but in
2008 the government enacted the
unorganised workers social security
Act, 2008.
 Under this act Social security boards
were set up at national and state levels.
 Under the Swavalamban scheme,
2010, the government makes
contributions towards the NPS
accounts of unorganised labourers.

 Permanent employment and job  Casual labour, high mobility and low
security. bargaining power.
 No job security.
 https://shodhganga.inflibnet.ac.in/bitstream/10603/115331/8/08_chapter%202.pdf
http://www.ilo.int/wcmsp5/groups/public/---ed_emp/documents/publication/wcms_142295.pdf

3. Formal vs. informal

Formal MSMEs are usually defined as being officially registered while informal MSMEs are not.

Types of enterprises – by Size

The sector is classified into micro, small, and medium enterprises based on the size of initial
investment in plant and machinery or equipment as defined by the MSMED Act. Almost 99
percent of the entire sector comprises micro enterprises, followed by 0.52 percent small and
0.01 percent medium enterprises.
Size of MSME sector in India (in millions)

70
63.052

60

50

40

30

20

10

0.331 0.005
0
Micro Small Medium

Types of enterprises – by industry

The key industries that dominate the MSME sector across the country are food products,
textiles, and retail. Estimates indicate that the manufacturing sector accounts for an estimated
31 percent of all enterprises in the sector, while the services sector at 69 percent.
Top five Industry of Operation (percentage of total MSMEs)

50 46
45
40
35
30
25
20
15
10 6 5 4
5 3
0
Retail Food product Wearing Repair and Textiles
and Beverages Apparel Maintainance
of motor
vehicles

State-wise Distribution of enterprises

SI Number STATE / UT NUMBER(in lakhs) SHARE(in percentage)

1 Uttar Pradesh 89.99 14

2 West Bengal 88.67 14

3 Tamil Nadu 49.48 8

4 Maharashtra 47.78 8

5 Karnataka 38.34 6

6 Bihar 34.46 5

7 Andhra Pradesh 33.87 5

8 Gujarat 33.16 5

9 Rajasthan 26.87 4

10 Madhya Pradesh 26.74 4

LIST OF REFERENCES
1. Financing Sustainable Production among MSME clusters- Experiential learnings and policy
recommendations. This paper is based on the learning drawn from Work Package-4 of the
project “Scaling Up Sustainable Development of MSME Clusters in India” funded by the
European Union and the SIDBI. Authors: Ms. Sangeeta Agasty, Mr. Amit Tyagi, and Ms.
Ruchita Sanwal. Retrieved from: http://fmc.org.in/wp-content/uploads/2012/10/Learning-
Paper-Financial-Linkages.pdf

2. Promoting sustainable development of MSMES- policy recommendations on public

schemes of assistance and their implementation (April 2016). Authors: Dr. Sheela Bhide, Ms.
Sangeeta Agasty, and Ms. Komalpreet Kaur. Retrieved from: http://fmc.org.in/wp-
content/uploads/2012/10/Policy-Paper-SCP-Scheme.pdf

3. Study on brand building in clusters to improve competitiveness of MSMES. The study

within FMC was coordinated by Ms Sangeeta Agasty under the guidance of Mr. Mukesh Gulati,
the Executive Director of FMC. Retrieved from: http://fmc.org.in/wp-
content/uploads/2012/10/Study-on-Brand-Building-in-Clusters.pdf

4. Promoting innovation in clusters(2013). Authors: Dr. A.S. Rao , Mr. Mukesh Gulati,Dr.
Tamal Sarkar, Mr. Ranjan Singh, Mr. Keerthi Lal Kala, Mr. Sourabh Gargav , Dr. Ashutosh
Khanna. Retrieved from: http://fmc.org.in/wp-content/uploads/2012/10/Promoting-Inovation-in-
Clusters.pdf

5. Employment Intensity of Output in selected Clusters of India- An Analysis of Factors for

Employment in MSME Clusters. Institute of Applied Manpower Research, Planning
Commission, Government of India. Retrieved from: http://fmc.org.in/wp-
content/uploads/2012/10/Factors-for-Employment.pdf

6. Making clusters work – UNIDO methodology . Retrieved from: http://fmc.org.in/wp-

content/uploads/2012/10/Making-Clusters-work.pdf

7. Report on conditions of work and promotion of livelihoods in the unorganised

sector(2007) by the National Commission for Enterprises in the Unorganised Sector. Retrieved
from: https://msme.gov.in/sites/default/files/Condition_of_workers_sep_2007.pdf

8. Financing India’s MSMES- estimation of debt requirement of MSMES in India by the

International Finance Corporation (World Bank Group). Retrieved from:
https://www.ifc.org/wps/wcm/connect/dcf9d09d-68ad-4e54-b9b7-
614c143735fb/Financing+India’s+MSMEs+-
+Estimation+of+Debt+Requirement+of+MSMEs+in+India.pdf?MOD=AJPERES

9. SMES in domestic economies and SMES participation in trade(2016)- World Trade

Report 2016. Retrieved from: https://www.wto.org/english/res_e/booksp_e/wtr16-1_e.pdf

10. Annual Report (2017-18)- Government of India (Ministry of Micro , Small and Medium
Enterprises ). Retrieved from: https://msme.gov.in/sites/default/files/MSME-AR-2017-18-Eng.pdf

11. The Micro, Small and Medium Enterprises Development Act , 2006- Arrangement of
sections. Retrieved from: https://indiacode.nic.in/bitstream/123456789/2013/3/A2006-
27.pdf#search=Micro%20Micro,%20Small%20and%20Medium%20Enterprises
12. Operational characteristics of unincorporated non agricultural enterprises (excluding
construction) in India- Government of India , Ministry of Statistics and Programme
Implemetation and National Sample Survey Office. Retrieved from:
http://mospi.nic.in/sites/default/files/publication_reports/NSS_581.pdf

Development Commissioner (MSME). Report on Census of Small Scale Industrial Units ,

January 1977. Retrieved from: http://www.dcmsme.gov.in/ito_msme/censuses.htm