From UPSC perspective, the following things are important :
Prelims level : Criteria for MSMEs
Mains level : Paper 3- Formalisation of MSMEs
The lack of formalisation has several implications for MSMEs. Registering them could help them in various ways. The article deals with the issue of formalisation.
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Steps taken by Government to Formalize MSME
- UAM: In 2015, the government notified the Udyog Aadhaar Memorandum (UAM), an online filing system for MSMEs.
- As of January, 86 lakh MSMEs had registered on the UAM portal.
- In 2016, the government notified rules under which MSMEs had to furnish information relating to their enterprises, online, in an MSME databank.
- As of January, only 1.6 lakh units registered on it.
- A new process of classification and registration for small businesses took off on July 1 called as “Udyam”.
- As of October 1, the MSME ministry has confirmed that only 7 lakh registrations have taken place using the new system.Nudge by the government
- In an attempt to nudge more enterprises to become lifetime Udyam, the government has integrated the system with the Trade Receivables Electronic Discounting System (TReDS) and the Government e-Marketplace (GeM).
- In its updated Priority Sector Lending (PSL) guidelines, the RBI has established that for the purposes of PSL, MSMEs will be identified as per the gazette notification laying down the new process of classification and registration.
Addressing the concerns
- While the Udyam initiative holds more promise, it is important to assess if this will be detrimental to accessing formal finance.
- To this end, the government and RBI should consider whether the registration requirement can be exempted for units with investment and turnover that falls in the lower end of the criteria.
- In 2018, the International Finance Corporation estimated that the overall supply of finance from formal sources met only one-third of the credit demand of the MSME sector.
- Enabling strategies such as PSL could provide a fillip to priority sectors including MSMEs which require increased formal financing.
The costs of formalisation and compliance are high and onerous in many states in India. In such an ecosystem, there are perverse incentives to remaining small and informal. Governments’ efforts towards formalisation should be directed towards addressing these issues.