Startups are increasingly adopting hybrid business models to increase access to MSME clients
Govt offers a range of benefits to companies registered as startups and MSMEs
Both startups and small businesses face similar challenges of visibility, credit and room for growth
Inc42 & Dell are bringing the startup ecosystem together for The Dialogue on June 27 to celebrate MSME Day 2019 and help startups, tech giants navigate the MSME market, opportunities, and challenges to help them efficiently work with this vibrant sector. We invite all startups, investors, and other stakeholders from the Indian MSME ecosystem to come and enrich the roundtable dialogue.
As the Indian government looks to celebrate its vibrant MSME sector at the UN-backed MSME Day on June 27, it’s a good time to understand how Indian startups can benefit if they look at the MSME sector to operate in. Startups in India today are relentlessly focussed on employing technology to bring great experiences to consumers. Be it near-painless food delivery, doctor appointments, insurance, entertainment or digital payments, startups have permeated into the everyday lives of Indians in cities, as well as the bigger towns in ways that were thought to be impossible a few years ago.
The exponential growth shows that for those who have spotted an opportunity or have an idea, there is a real chance of succeeding as the startup ecosystem has matured over the last decade. As it evolves towards profitability and greater penetration in rural areas, entrepreneurs can register as MSMEs (Micro, Small, and Medium Enterprises) to grow faster, increase the user base and innovate to solve very specific problems that technology has so far ignored.
This is because while startups are afforded plenty of benefits by the government, the MSME sector, being a large employer and contributor to the GDP, has also been courted with sops, subsidies and other benefits over the decades.
Startups and MSMEs face similar challenges of visibility, credit and room for growth. However, they can be very different in terms of the business setup and growth curve, funding opportunities, technology and the customer base. That’s where a huge opportunity lies for startups and MSMEs to work together to meet each other’s specific needs.
Even as the government sees MSMEs and startups as the backbone of the digital economy, these sectors need assistance and protection from other big companies through specific and dedicated schemes, tax breaks, training and counselling. It can be useful for startup founders and entrepreneurs to consider the benefits that they may be able to avail if they looked to enter the MSME sector.
How Startups Differ From MSMEs
To begin with there is a basic difference in how the government defines startups and MSMEs. What is a startup, and how is it different from MSMEs?
The legal definition of a startup is an entity that has been in registered not more than seven years ago, and has an annual turnover not exceeding INR 25 Cr in any preceding financial year. The startup must also have been working towards innovation, development or improvement of products or processes or services, or it is a scalable business model with a high potential of employment generation or wealth creation.
Meanwhile, small and medium-sized enterprises (SMEs) are defined as small-scale units with an investment up to INR 1 Cr in plant and machinery, provided it is not owned by or controlled by a subsidiary of any other industrial undertaking. This latter condition ensures that larger corporate entities do not set up subsidiaries to get the same benefits afforded to SMEs.
For MSMEs, the government has set up different slabs as part of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 to differentiate between manufacturing and services sectors. These are as follows:
Manufacturing Or Production MSMEs
Micro – Investment less than or equal to INR 25 Lakhs
Small – Investment more than INR 25 Lakhs but limited to INR 5 Cr
Medium – Investment more than INR 5 Cr but less than INR 10 Cr
Micro– Investment in equipment does not exceed INR 10 Lakhs
Small – Investment in equipment more than INR 10 Lakhs but limited to INR 2 Cr
Medium – Investment in equipment more than INR 2 Cr but less than INR 5 Cr
While the central government and the states have come up with their own state policies to encourage startups, which include easy online registration, access to funds, tax holidays and most recently the opening up of the Government eMarketplace (GeM) to startups, the benefits that the government affords to the MSME sector are of a different nature.
Benefits Of Being An MSME
While startup support is something of a newer phenomenon for India, MSME benefits and sops have been in place for a few decades now and include priority lending, cheap location services, opportunity to adopt latest quality management standards and more.
- Reservation: MSMEs get exclusive benefits for manufacturing certain products, which makes them more competitive and allows them the capacity to generate employment opportunities faster than startups.
- Real Estate: SEZs (special economic zones) are required to allocate 10% space for small-scale units, which allows businesses to operate worry-free and protect themselves from losses due to real estate value fluctuations.
- MSME Act: Benefits and policies for MSMEs under this act include loans for technology upgradation, cluster development, skill development, tool rooms, manufacturing competitiveness, energy efficiency, and product quality
- Finance: Government of India provides SMEs assistance for obtaining finance, and companies whose post-issue face value does not exceed INR 25 Cr are eligible for exemption.
MSME Day: How Startups Can Benefit From MSME Registration
While the differences in definitions of startups and MSMEs mean most startups will miss this cut off, the government is considering policy changes to broaden and energise one of Prime Minister Narendra Modi’s initiatives, Startup India, to include a larger number of startups under the ‘medium industry’ category that would be eligible for public procurement incentive and preferential benefits. The idea behind this is to provide an equal platform to startups to participate in the Indian economy vis-a-vis the established companies.
Coupled with the fact that many startups are venturing into offline or hybrid business models and trying to get greater control of the manufacturing process, they stand to benefit from examining the benefits of MSME registrations while considering their expansion plans.