Unwelcome Change

Strange are the ways of the government at times. For instance, in the beginning of the twentieth century, the government of Madras Presidency created two posts of LBC (Linlithgow Bull Clerk) and LBA (Linlithgow Bull Assistant) merely to please the incoming Viceroy; and the two posts were abolished only in the 1970s on the recommendations of the State Finance Commission. Another, more recent, example of weird decision of the government is a current bill pending in Parliament for changing the manner of classifying micro, small and medium enterprises.

It is really amazing that while the MSME (Micro, Small and Medium Enterprises) sector as a whole is in dire straits, struggling with the anxieties and pressures of a stressed economy, shrinking employment, depressed exports and liquidity crunch, the Government of India is worried about the manner in which they are defined. The small producers have not yet fully emerged from the tremors of demonetisation; they need immediate policy support from the government and financial institutions. There are huge and more urgent issues to be sorted out regarding the fate of millions of existing and more millions of prospective entrepreneurs. The proposed change in method of classification, by any stretch of imagination, is not going to provide better marketing and profitability or more jobs to them.

I wouldn’t have come to know of this ingenious method of appearing as the saviour of the small man if the Parliamentary Committee had not called me to give my expert views on the proposed legislation tabled by the government for the aforesaid purpose.

Either the timing of the largely intellectual exercise appears inopportune, or the minions of Udyog Bhavan consider it a lot easier to change the method of classification rather than taking the trouble of doing something worthwhile to lend a helping hand to MSMEs

To a kindly observer, either the timing of the largely intellectual exercise appears inopportune, or the minions of Udyog Bhavan consider it a lot easier to change the method of classification rather than taking the trouble of doing something worthwhile to lend a helping hand to them. Reading the amendment under the consideration of the Committee, it is not clear as to how the proposed dispensation would add any value to the present system that has been in place for decades. Besides, hundreds of thousands on enterprises will have to undergo the process of redefinition with no perceptible gain.

To the best of my knowledge, there has never been a reasoned demand for such a change from the sector. The government has, however, been toying with the idea of copying some other countries, and rejecting it. I had the occasion of interacting with industry associations and representatives on several issues relating to MSMEs, including definitions. They did not suggest a change in method of classification.

It is said in the statement of objectives and reasons that it is for facilitating the promotion and development and increasing the competitiveness of MSMEs. I fail to understand how a mere change in classification would promote and develop the enterprises. In fact, if that is the genuine concern of the government, there are several other policies required to serve these purposes. The statement of objectives and reasons also says that physical verification of plant and machinery involves transaction costs. Needless to say, it is a one-time exercise for the entire life of the unit, whereas changes in turnover near the transition limits would necessitate change in classification more than once with corresponding change in benefits.

The statement of objectives and reasons says that it is intended to align with the need of current times and changing business ecosystem. According to the statement, it is clear that the convenience of the government is the main reason rather than the interests of the enterprises. Incidentally, the present system of classification is equally non-discretionary, transparent and objective.

Another reason mentioned in the statement is that entrepreneurs have a tendency of keeping the investment size small to retain the benefits of micro or small enterprises. I think the same tendency will be seen in keeping the turnover within specified limits (and starting another business for additional turnover). The illicit tendency of concealing excess turnover may also result.

The statement of objectives and reasons says that the name change is intended to align with the need of current times and changing business ecosystem. It is clear that the convenience of the government is the main reason rather than the interests of the enterprises

One could understand an enhancement in the amounts of investment in plant and machinery because of introduction of new technologies of production. But that could also have its own implications.

Another angle in this context is that of employment. It is recognised that one of the main strengths of MSMEs and argument for their promotion is creation of employment opportunities with lesser investment. I have not studied the impact of the new classification in detail. But at first sight, it appears to be an anti-employment strategy.

Take the example of a labour intensive conventional enterprise (e.g. bakery) with very little capital investment employing hundreds of workers. Today, it would be a micro unit. However, according to the proposed amendment it can be a micro unit, a small unit or a medium unit (or even a large unit) depending upon the turnover. The turnover is directly related to the number of workers; more the number of workers more the turnover.

Imagine another sophisticated unit based on the latest technology producing the same product. Though its capital investment is more than `10 crore, it can also be a micro, small, medium or large depending on its turnover and enjoys the same benefits as the labour intensive unit. But it employs less than a dozen workers. The labour intensive unit will always be the loser.

Finally, according to the proposed amendment, a unit of production starts as a micro unit in the initial years enjoying the benefits available to micro units; then becomes a small unit for a couple of years enjoying its benefits; and then gets into its normal category as medium or big? It also means that if the market conditions change for a particular product, the classification also changes? The international market would keep changing the category of thousands of units based on exports. Will it not create problems for everybody, including the government?

Endpoint: The small man doesn’t know that definitions belong to the definers, not to the defined.
The writer is former Cabinet Secretary