In June 2020, the MoMSME issued a notification revising the definition of Micro, Small and Medium Enterprises (MSMEs) and introduced a new registration system — the Udyam.
But the numbers for the new Udyam registration system remains low, and here is why.
What were the changes made?
With effect from July 1, 2020, the revisions in the MSME definition were three-fold:
the distinction between manufacturing and services sector MMSEs was removed
an additional criterion of turnover was introduced
investment thresholds were revised upwards
The notification also introduced a new procedure for registration in accordance with the revised MSME definition, under the Udyam system.
How is the level of registrations?
As on March 31, 2021, which was the deadline for registering under the new Udyam system, only 26.4 lakh enterprises have registered.
This means less than 5% of the total estimated MSMEs (6.33 crore) in the country are Udyam registered now.
The previous registration system for MSMEs — the Udyog Aadhaar Memorandum (UAM) — had more registrations.
Introduced in 2015 and operational until June 2020, this system had a little over one crore registrations.
This is approximately 16% of the estimated MSMEs.
Like the UAM system, the Udyam system is also free of cost, paperless and digital.
An important difference is that under Udyam, once Aadhaar/PAN is provided, all the relevant income tax and GST data can be pulled from the respective government databases, at the backend.
Moreover, a single registration is enough for multiple activities undertaken by the same enterprise.
What are the benefits under Udyam registration?
Enterprises who self-certify and attain registration are eligible for certain benefits.
These range from being eligible for subsidy schemes like the Credit Linked Capital Subsidy Scheme (CLCSS) to registering complaints regarding delayed payments on the MSME SAMADHAAN portal.
As per the RBI’s notification, from August 2020, lenders may demand the Udyam registration for credit purposes.
The Udyam portal is also integrated with the Government e-Marketplace and the Trade Receivables and Discounting System (TReDS).
So, these enterprises can participate in government procurement, and have a mechanism for discounting their bills.
Why is the registration rate low then?
One reason could be the earlier requirement that companies that wanted to register under Udyam had to provide their GSTIN.
Since many companies have a turnover of less than Rs 40 lakh and hence do not need to be GST compliant, it rendered them ineligible to register.
Such a requirement was removed by the MoMSME on March 5, 2021.
However, since the deadline for registration was March 31, 2021, this intervention could have deterred many MSMEs from registering.
Of the total Udyam registered enterprises, only 2% are with GSTIN.
Another reason could be the lack of awareness regarding the new registration system itself.
This is a general observation when examining low off-take of schemes that are rolled out for the sector.
Low levels of awareness regarding the roll-out of schemes, their eligibility conditions, paperwork requirements and grievance redress mechanisms impact overall off-take of these schemes.
Another grim but likely explanation could be that a vast number of MSMEs have had to wind down in the pandemic period.
Despite policy initiatives to give the sector a fillip, lockdowns and disruptions in supply chains have had their own impact.
What will the implication be?
The fate of close to 6 crore unregistered entities remains uncertain.
The question remains whether they will be allowed to avail subsidies and other credit facilities without an Udyam registration.
Priority Sector Lending (PSL) directions have not stated an explicit requirement for a UAM or the Udyam number.
However, since the RBI has allowed lenders to demand the Udyam registration for credit purposes, it is possible that some may choose to do so.
Given the already burgeoning credit gap in the sector, lenders placing such requirements for a priority sector could further accentuate the credit gap for MSMEs.
What next?
While the expectation is that the deadline will be extended, the need to ramp up the execution of such important initiatives cannot be overstated.
Ten states in the country account for 74% of the total estimated MSMEs.
In states that make up the predominant share of MSMEs, the MSME-District Institutes and other field offices of the MoMSME must be roped in.
They must be tasked with educating and creating awareness regarding the Udyam system, on a priority basis.
Last-mile awareness regarding systems and schemes that can benefit MSMEs will be a necessary step towards bridging the never-ending access gap.
