Challenges and Opportunities of India’s Micro Small Medium Enterprises in the New Era of Post COVID

This paper examines the possible changes from the new denition of Micro, Small, Medium Enterprises (MSMEs) in the Manufacturing and Services sector using NSS 73rd round data and Annual Survey of Industry (ASI). The paper further analyses the nature of registered/unregistered enterprises in MSMEs. Analysis reveals that 16.1 percent (3.2 million), 38 percent (16.6 million), and 31.2 percent (19.8 million) enterprises are registered in manufacturing, services, and whole economy respectively. It is worthy to note that share of unregistered enterprises in overall loan taken by the enterprises is only 2 percent, the remaining 98 percent of loan has been provided to registered enterprises. Registered enterprises easily access the loan from the formal channels while unregistered enterprises face problems in accessing loan from the formal channels. The regression result shows that the number of skilled workers, the rm’s registration, modernization, and environmental monitor variables have a positive impact on the MSMEs output value. The large enterprises need to make structural changes with focus on generating employment at a larger scale in order to take advantage of the recent trade war between China and other developing countries. There is a simultaneous scope to promote larger enterprises with MSMEs.


Introduction
The Micro, Small, and Medium Enterprises (MSMEs) sector plays a critical role in generating employment opportunities and is often called the backbone of the economy which employs a signi cant number of workers, which next only to agriculture (Saxena and Jagota;2015). This sector also creates employment opportunities in rural areas with low capital cost which help in reducing the regional imbalance in the economy. The MSMEs sector contributes 45% of India's total export, generates more than 114 million jobs and accounts for 33.4% of India's manufacturing output (EPW; 2020). The sector is highly vulnerable to external factors (Ghosh;2020 and EPW;. COVID-19 pandemic has impacted every sector of the economy and the MSMEs sector has been particularly affected due to supply-side disruption and reduction in demand. The demands for the readymade garment, furniture, tobacco, leather, electronics, and rubber & plastic products have been very low in the economy in the last few months. In order to address sluggishness in the economy and MSMEs sector speci cally, Union Government announced a special package of INR 3 lakh crores Collateral free Automatic Loans along with six reforms under the Atmanirbhar Bharat Abhiyaan (Self-Reliant) to revive the MSMEs. Among several reforms, one was related to the change in the de nition of Micro Small & Medium Enterprises (MSMEs) rms. Further, on 12th November 2020, Government of India announced Atmanirbhar Bharat Package 3.0 and allocated INR 1.46 lakh crores for Production-Linked Incentives Scheme to boost the manufacturing sector.
In this context, we have tried to address the four following questions; a) what would be possible changes in terms of the number of enterprises from the new de nition of MSMEs for both the sectors? b) What is the nature of micro, small and medium enterprises in the registered and unregistered sector? c) What are the key constraints faced by MSMEs? d) What factors determine the value of output in MSMEs? Apart from abstract and introduction, this article is divided into ve sections. The second section presents an overview of the data used. The third section analyses the de nitional changes in the MSMEs. The fourth section presents the registered and unregistered enterprises of MSMEs. The fth section discusses the employment nature of MSMEs. Section sixth presents the problems faced by MSMEs followed by conclusion.

Overview Of Data: Sources And Concepts
We used unit-level data of the National Sample Survey (NSS) 73rd (2015-16) round on 'Unincorporated Non-Agriculture Enterprises in India' and Annual Survey of Industries (ASI), 2015-16. ASI covers all factories registered under Sect. 2(m) (i) and 2(m) (ii) of the Factories Act, 1948. ASI covers the organized industries of the country and this survey is conducted every yearly basis. NSS 73rd round survey provides the basic economic and operational characteristics of the manufacturing and service sector enterprises. This survey covers Manufacturing enterprises excluding those registered under Sections 2m(i) and 2m(ii) of the Factories Act, 1948 and includes the Manufacturing enterprises registered under Sect. 85 of Factories Act, 1948, Trading enterprises and Other Service sector enterprises excluding construction rms. NSS 73rd round survey covers all unorganized units which are not covered by the ASI. When we club the gures of ASI and NSS data, we get a complete picture of enterprises in the whole country. NSS 73rd round survey assesses whether enterprises are registered under any act/authority such as; Shops and Establishment Act, Municipal Corporation/ Panchayats/ Local Body, Vat /Sales Tax Act, Provident Fund Act, Employees State Insurance Corporation Act, Registered with SEBI/ Stock Exchange (item no 227 & 228 in the 73rd round questionnaire). If an enterprise is registered under any one of them, it is considered as registered enterprise, otherwise it is enlisted as an unregistered enterprise. Total registered enterprises include number of enterprises in ASI along with number of enterprises registered under any act/authority in the NSS 73rd round survey. The manufacturing sector is covered under National Industry Classi cation (NIC-2008) codes from 10 to 33 and the services sector under NIC-2008 codes from 45 to 99.

De nitional Changes Of Msmes
Earlier MSMEs were known as small scale industries. Prof.K.T. Shah (2012) de ned small scale industries as "a small scale or cottage industry may be de ned as an enterprise or series of operations carried on by a workman skilled in the craft on his responsibility, the nished product of which, he markets himself". The importance of small scale industries is underscored as "Small scale industries are of very special importance in India. If we lack capital, we do not lack manpower, and we must use this manpower both to add to the wealth of the country and to reduce unemployment". In 1954, Small Industries Development Organization was set up to maintain and sustain growth of small scale industries. Medium enterprise was introduced in Micro Small & Medium Enterprises Development (MSMED) Act, 2006 (Nair & Das;. This act classi ed the MSMEs for both the manufacturing and service sectors. Manufacturing enterprises are "the enterprises engaged in the manufacture or production of goods pertaining to any industry speci ed in the rst schedule to the Industries (Development and Regulation) Act, 1951 or employing plant and machinery in the process of value addition to the nal product having a distinct name or character or use". While service enterprises are "the enterprises engaged in providing or rendering of services and are de ned in terms of investment in equipments". The act de nes MSMEs distinctly for the manufacturing and service sector in terms of investment in plant & machinery. The investment-based criteria do not provide enough incentive for the industries to expand and grow up. Industries keep their plants at a small size to retain the bene ts associated with MSMEs and exhibit unwillingness to foster the expansion of the industry. Investment criteria itself is a self-declaration that needs physical veri cation and also incurs transaction costs. The MSMED Amendment Bill, 2018 was introduced in July, 2018 to de ne MSMEs based on their annual turnover. The turnover criterion is more appropriate than investment criterion to de ne MSMEs. Enterprises necessarily have to register under framework of Goods and Services Tax (GST) if their turnover exceeds the threshold limit. The criteria have the advantage of being non-discretionary, transparent, and eliminate the need for physical inspections. However, there is a loophole associated with turnover criterion as rms tend to under-report their turnover in order to as qualify MSMEs. There is no speci c MSMEs de nition that may be used as most comprehensive de nition in the world (Ardic, Mylenko & Saltane, 2011;Gibson & Vaart, 2008;ILO, 2015 andBerisha &Pula, 2015). De nition of MSMEs for the rst time was given in the Bolton Report of 1971. The report suggests that there are two approaches i.e. quantitative and qualitative, to de ne MSMEs. Generally, the quantitative method is used to de ne MSMEs. The study of International Labor Organization (ILO) found that there are over 50 de nitions of MSMEs in 70 countries with considerable ambiguity in the terminology used (Berisha & Pula;2015). World Bank de nes MSMEs as per composite criteria of the number of employees, total assets, and annual turnover. The number of workers constitutes an easily applicable criterion but it has certain limitations in the sense that the number of required workers varies according to the nature of business (Stokes & Wilson;2010). For example, the manufacturing sector requires more workers than the service sector. The requirement of workers also varies within the industry, and obviously from industry to industry (Yadav & Kumar, 2017). Similarly, some industries require more investment and produce lower turnover as compared to other industries. Therefore, the government of India introduced new composite criteria based on investment and annual turnover to de ne enterprises in manufacturing and services as micro, small and medium enterprises in a comprehensive de nition on 13 th May 2020. Further, the government of India decided on 1 st June 2020 to do an upward revision of medium enterprises. After revision, as per new composite criteria, a rm is considered under microenterprises category having investment less than INR 1 crore and turnover less than INR 5 crore, small enterprises are the ones having investment less than INR 10 crore and turnover less than INR 50 crore, and medium enterprises are the ones with investment and turnover less than INR 50 crore and INR 250 crore respectively, (Table 1). Any rm which exceeds the medium enterprise's criteria both in existing and new de nition is considered as large rms.   Our analysis reveals that in the services sector distribution shifted towards micro enterprises whereas in manufacturing sector we observed that there was an increase in the number of rms both in micro and medium category. In the manufacturing sector, if we take a look at sector-wise distribution of 13100 large rms that came under the purview of MSMEs, the top 3 gainers are the food products sector that accounts for 11.53 percent, textiles account for 11.45 percent and fabricated metal products account for 7.65 percent. Similarly in the service sector, sector-wise distribution of 12655 large rms come under the purview of MSME. The top three gainers are the education sector that accounts for 33 percent, retail trade accounts for 18 percent, and human health sector accounts for 10 percent (See Appendix-A). Certainly, the de nitional change of MSMEs has given a positive push to many rms across the manufacturing and service sector as these rms are now eligible for availing bene ts enjoyed by MSMEs. Rotenberg (2019) found that supporting small-scale rms in India via various subsidy in form of lower interest rates, free skills training, export subsidy, tax exemptions, and providing digital market platform, etc. improves the aggregate productivity by 1 to 2 percent in the economy.

Registered & Unregistered Enterprises In Msmes
The categorization of the formal/informal sector was de ned in the 17 th International Conference of Labour Statisticians (ICLS) in 1997. National Commission for Enterprises in the Unorganised Sector (NCEUS; 2008), Government of India de ned the formal/informal sector in the economy based on type of enterprise and the workers' size. This methodology has been widely adopted to de ne formal/informal sector of Indian economy. This paper de nes formal/informal sector among the industry groups based on the rm's registration. Registered and Unregistered enterprises have already been de ned in the previous section. Registered and Unregistered enterprises might be used interchangeably to signify formal and informal sector respectively. Our analysis shows the sector, service sector, and whole economy respectively ( Figure 1). The percentage of formal enterprises at micro-level in both the sectors is very low, especially in manufacturing. One-third of micro-enterprise in service sectors are formal, and this ratio has rapidly grown up in small and medium enterprises category. Only 14.6 percent (2.9 million) and 35 percent (14.2 million) micro-enterprises are registered in manufacturing and services respectively. Unregistered enterprises account for 18 percent in total industrial gross value added in which 94 percent comes from micro enterprises and rests from small enterprises. Unregistered manufacturing enterprises account for 9 percent in manufacturing GVA and while unregistered services enterprises contribute 32 percent in its GVA. Micro unregistered enterprises shared 96.5 percent and 92.4 percent in unregistered manufacturing and services enterprises respectively[1]. This indicates that unregistered micro-enterprises has a larger number of enterprises and workers but contribute lesser in GVA which is an indication that there is greater scope to make them registered. On the other hand, it has been observed that small, medium, and large enterprises are primarily in the registered sector. The turnover of these enterprises comes under the threshold limit of GST registration so that they are bound register in GST framework. Formalization of informal/unregistered MSMEs is highly relevant to boost up the MSMEs. Formalization is highly problematic in micro-enterprises where more than 95 million workers work in this sector which is approximately 76 percent of the total industrial workforce (Figure-2). The high rate of informality in micro-enterprises leads to low contribution in gross value added. Formalization helps in breaking the vicious circle of low productivity, enterprise performance, and precariousness of employment (ILO; 2015, Srivastava & Naik;2016 and Srivastava, Padhai & Ranjan;. Registration of enterprises has been rising after the introduction but it is still far away from desirable level, especially in the manufacturing sector. The micro-enterprises are Own-account enterprises[2] (OAEs) and tiny establishment enterprises. Own-account enterprises are run without any hired workers, even if workers are hired they are not done so on a regular basis. Hence, micro-enterprises have not come under the purview of Employees Provident Fund (EPF) and Employees' State Insurance Scheme (ESIS). The turnover of microenterprises is very low which also restricts their registration within Goods and Services Tax (GST) framework. The threshold for registration within the framework of GST is prohibitory, which means that it limits the formalization of micro enterprises. However, they can be transformed into formalized enterprises through the net of social security. The government of India amalgamated all the existing social security bene t acts passed between 1923 and 2008 and introduced a common social security code. The current code on social security recognizes the importance of social security in OAEs and tiny establishment. But it does not cover contributory workers, who are mainly female, and a large section of frontline nutrition and health workers, who have been described as "voluntary" workers

Key Constraints Faced By Msmes
The major constraints faced by MSMEs are following; a) To Combat with aftermath of COVID-19 COVID-19 pandemic has brought an enormous loss of human lives and virtually crippled economies worldwide. This pandemic has adversely impacted enterprises and workers both in the organized and unorganized sectors of the economy. In particular, the COVID-19 lockdown has adversely impacted the MSMEs sector in terms of closure, job losses, revenue losses, and many units have reached the brink of becoming defunct. MSMEs sector has already been reeling under severe distress because of demonetization and poor implementation of GST. Prolonged economic slowdown compounded the problems faced by MSMEs and lockdown induced by COVID-19 might prove to be nal nail in the co n. The study conducted by the All India Manufacturing Organization (AIMO) among 46, 525 MSMEs between 24-31 May 2020 showed that 35% of MSMEs and 37 % of self-employed respondents said that their enterprises were beyond recovery. 32 % said that their recovery would take 6 months and 12 % said that it would take less than 3 months. Only 3 % of MSMEs, 6 % of corporates, and 11 % of self-employed said they were unaffected because they were involved in sectors related to essential goods/services. The data of Index of Industrial Production (IIP) which is a proxy of industrial performance showed that a negative growth rate was reported in major industries in the last few months. However, IIP for the month July 2020 re ects the gradual pickup in industrial activity in the economy but it is still below the initial points, and the IIP percentage growth rate between April-October is negative[1].
NSS 73 rd round data showed that 29 percent of micro, 43 percent of small, and 43 percent of medium manufacturing enterprises were in the phase of expanding while more than 50 percent of manufacturing MSMEs have been in stagnant phase for last three years. 37 percent of manufacturing and service sector enterprises reported that they had faced problem of shortage of demand in the last three years. Demand has already been shrinking in the last few months in the economy and effects of COVID-19 pandemic might worsen the performance of MSMEs. The quick revival of the MSMEs sector would require a special focus on boosting exports and generating domestic demands.

b) Access to credit/ nance/loan
Accessing credit through formal channels is one of the major bottlenecks to the MSMEs (Beck & Demirgüc-Kunt, 2006;Bhattacharya, 2013). Access to nance for MSMEs contributes to economic development and poverty reduction (Kersten et al., 2017). The government of India has introduced many programs over time in order to bring exibility in the system which could provide loan to It is worthy to note that unregistered enterprises only availed 2 percent of overall loan taken by the enterprises, the remaining 98 percent of loan has been availed by registered enterprises. Registered enterprises easily access the loan from formal channel[2] while unregistered enterprises have had a problem in accessing loan from the formal channel (Nikaido et al., 2015;Bakhtiari , 2020 andBanerjee &Du o, 2014). Figure-3 shows that more than 80 percent of loans have been provided by formal channels in the registered manufacturing and service sector MSMEs. While less than 50 percent of loans have been provided by the formal channel in the unregistered MSMEs. This indicates that unregistered enterprises have had the problem of accessing the credit from the formal channel. The unregistered enterprises could not ful ll the documentary requirements and that restricts access to credit from the formal channel. Recently, the government of India announced the INR 3 lakh crore loan scheme for MSMEs to revive this sector from distress generated by COVID-19 pandemic. It seems that the loan scheme would be helpful just for registered MSMEs unless problems associated with unregistered MSMEs are not sorted out. Most micro-enterprises are OAEs and tiny establishments. OAEs run the enterprise without any hired workers. The OAEs are unskilled or have a low education level. There is a positive relationship between skill and formal employment. The share of formal employment tends to increase with an increase in skill attainment (Fatima and Sultana, 2009;Mazumdar and Neetha, 2011). A rise in the level of skill opens many opportunities in the labor market. They get the opportunity to move from agricultural sector to other better-off sectors in terms of average earning like manufacturing and service sectors. In other words, skill is positively related to upward mobility.

d) Access to infrastructure
Infrastructure is the basic building block of the economy and the one of the most important factors of the factor of production. Infrastructure facilities include all railways, waterways, roadways & airways, proper channels of telecommunication, adequate supply of power, tool rooms, testing labs, and design centers, etc. which need to be developed to attain the maximum growth in the MSMEs.
NSS 73 rd round data show that 42% and 26% manufacturing and services MSMEs respectively have had an input shortage problem in the last three years. The input shortage problem includes the issue related to erratic power supply/ power cuts, shortage of raw materials and labour disputes, and related problems. Allcott et al. (2016) have found that a shortage of electricity in India reduces the revenue of rms between the ranges of 5.6 percent to 7.7 percent and decreases the producer surplus by 9.5 percent. Electricity shortage prevents rms from adopting digital modes of operation as well as restricts the use of machineries in plant. Further, it in uences the input choices and size of the rms. A study on Ghana small garments rms by Hardy and McCasland (2019) found that electricity blackout has a higher cost for the microenterprise rms with zero and one worker.

e) Access to technology & environment constraints
It is imperative to reduce industrial waste to foster environmental compliance. The concept of the Common E uent Treatment Plant (CETP) is relevant example for MSMEs to manage water waste (FICCI, 2011). NSS 73 rd round data show that 35.11 percent of enterprises have provision for solid waste management and 74.87 percent of enterprises do not generate liquid waste. Technology plays an important role in the economy, particularly in its development phase (FICCI, 2011 & Mehrotra;. The use of inadequate technology leads to low productivity in the enterprise and precludes maximizing machinery utility, which in turn limits improvement in technology due to shortage of funds (Saini, 2014). Technology up-gradation has to be done in MSMEs in order to become competitive in the global market (Mukherjee, 2018).

Determinants Of Msmes Value Of Output
In this section, we examine the possible factors which affect the value of output in the MSMEs using NSS 73 rd round data. This paper considers the following factors such as; number of skilled workers, rm's registration, modernization, environmental monitor, capital intensity, ownership of the rm, industrial classi cation, location of the rm, and enterprise type. Semi-log linear function has been employed for estimating these variables simply. We have used the log value of output as a dependent variable.
Modernization: NSS asks the enterprise regarding maintenance of account from books of accounts (item no. 216 & 217) and whether they use computer during the 365 days (item no. 218). The modernization variable is constructed in a way that depends on either usage of computer or maintenance of accounts from books of accounts.
Environmental Monitor: If the enterprises have a provision of solid waste management (item no. 245) or enterprise have provision for liquid waste management (item no. 246) being considered an environmental monitor variable.
Capital Intensity: The total person engaged and xed capital is used for measuring capital intensity.
Firm's Ownership: NSS gives information regarding the type of ownership such as; male proprietary, female proprietary, transgender proprietary, partnership with members of the same household, partnership between members not belonging to the same household, Self-Help Group, Trust, and Others. This paper classi ed rm's ownership into three groups i.e. Proprietary (Male. Female and Transgender proprietary), Partnership (partnership with members of the same household and partnership between members not belonging to same household), and Self-Help Group, Trust and Others are combined all three for the third group.
Industry Classi cation: The whole sector is divided into the manufacturing and service sector. . Manufacturing sector is covered by codes from 10 to 33 in National Industry Classi cation (NIC-2008) codes and service sector is covered by codes from 45 to 99 NIC-2008 codes.
Location of the Enterprise: NSS provides information about location of enterprise such as; within household premises, outside household premises, with xed premises, and with a permanent structure, with xed premises and temporary structure, with xed premises but without any structure, mobile market, and without xed premises (street vendors). Further, the location of the enterprise is categorized into three groups i.e. Within Household premises, Outside Household premises with xed structure (outside household premises, with xed premises and with permanent structure, with xed premises and with temporary structure, with xed premises but without any structure) and Mobile market & Street vendors.
Enterprise Type: There are two types of enterprise Own Account Enterprise and Establishment. Own Account Enterprise means an enterprise which is run by without hiring worker regularly and establishment means an enterprise which is run with at least one hired worker.
The nature of independent variables is represented in table 4. Table 5 gives the summary statistics of the variables and Table 6 shows the regression results.   The above regression analysis establishes the statistical validity of constraints faced by the MSME sector. The number of skilled workers has a positive association with MSME output because skilled workers are more likely to learn about and adapt to changes in the production technology, gather latest market information related to product design and other new development pertaining to business activity. Regression analysis, further reveals that the variable 'the number of skilled workers' is signi cant at a one percent level of signi cance. Similarly, the skilled workers and the rm's registration give several advantages to the rm over unregistered rms such as access to formal credit, eligibility for various governmental schemes, and more awareness about the changes in the laws regarding business in the economy. It is noted that 98 percent of formal credit goes to registered rms. The regression result also shows that lack of registration of a rm is negatively associated with the rm's output and it is signi cant at a one percent level of signi cance. It is important to mention that maintaining a nancial account is an essential requirement to avail loan from banks or any other private entity because it helps the bank to measure the net worth of the rm. Often small rms operate their business activities in informal ways; they don't maintain an account, do not use computer services such as access to internet, do not maintain basic data management of orders and inventory, etc. It was found that rms which don't maintain accounts and do not use computer services have negative impact on their output compared to modernized rms. The modernization variable is signi cant at one percent level of signi cance. Firms that are not environmentally aware in terms of solid or liquid waste management have negative impact on their value of output compared to more aware rms. Environment-friendly rms can cut their cost in long run either due to being eligible for a government subsidy or by making alternative use of waste in form of electricity generation etc. A rm which uses more machinery and technology have higher labor productivity in terms of per capita availability of capital to the labor as compared to rms with low capital intensity. The capital intensity variable is positively associated with rms' output (Table 6). Firm ownership types have clear implication for rms output because entrepreneur of the rms take several business decisions such as the amount to be invested in the business, pricing of the product, marketing strategy of the rm, location of the rm, hiring & ring workers in the rms, adoption of new technology, etc. The partnership rms have a positive impact on output because it gives advantage to the rm in the form of extra capital brought by the new partner in the rm and division of managerial work among partners improves the supervision of overall business activities.
Self-help group, trust, and others ownership type have a negative relation with rms output due to problem of a free rider, poor coordination regarding the management of the business activity, the problem in decision making due to difference of opinions amongst several members in the business, di culty in establishing accountability due to absence of well-de ned rules, etc. (Table 6). The variable 'location of a rm' has an important bearing on the rms' output, the rm located outside household premises with xed structure has a positive relation with the output of rms and rms located within households has a negative relation with the output. It substantiates that infrastructure in terms of xed structure with electricity is relevant for the rm's performance. In addition, the establishment has a positive relation with the rms' output and it is signi cant at one percent level of signi cance. Thus, our analysis empirically reveals the factors which in uence the output of both manufacturing and service sector rms.

Conclusion
In the current situation, one of the biggest challenges for MSMEs is the shrinking demands in the economy. The index of industrial production (IIP) shows that the growth of all major manufacturing industries of MSMEs has had negative growth rate in the last few months and continued to be so from April to October 2020. The aftermath of COIVD-19 pandemic is likely to persist for some time in the future also. The new de nition would lead to reshu ing of existing enterprises and also lead to addition of new enterprises, especially that of registered ones in the micro-enterprise category. The new loan scheme would be bene cial for registered enterprise unless bottlenecks associated unregistered MSMEs are not sorted out. Our analysis reveals that 16.1 percent (3.2 million), 38 percent (16.6 million), and 31.2 percent (19.8 million) enterprises are registered in manufacturing, services, and whole economy respectively.
NSS 73 rd round data showed that 29 percent of micro, 43 percent of small, and 43 percent of medium manufacturing enterprises were in the phase of expanding while more than 50 percent of manufacturing MSMEs have been in stagnant phase for last three years. 37 percent of manufacturing and service sector enterprises reported that they had faced problem of shortage of demand in the last three years. Demand has already been shrinking in the last few months in the economy and effects of COVID-19 pandemic might worsen the performance of MSMEs. The quick revival of the MSMEs sector would require a special focus on boosting exports and generating domestic demands. The government of India launched 4Es initiative which includes enterprise creation, employment generation, export, and ease of doing business to boost the MSMEs and make competitive them at global level. This initiative will also help MSMEs to export directly to global markets. There is a simultaneous scope to promote larger enterprises with MSMEs. Industrial growth cannot happen in a vacuum unless there is a way to promote the larger enterprises along with MSMEs.