Redefining MSME limits will facilitate MNCs to relocate to India

When multinational companies in China consider alternative investment locations in a post-Covid world, India will feature prominently in their discussions. And this definitive change can become the crucial differentiator in considering what each country has to offer.

Toyota Kirloskar Motor, the Indian arm of the Japanese auto major, was planning to bring several key suppliers from its global network to India following last year's cut in the corporate tax rate for new manufacturing units to 17.01 per cent. That initiative may receive a boost following Indian Finance Minister Nirmala Sitharaman's announcement last week raising the investment and turnover limits for the classification of Micro, small and medium enterprises (MSMEs).

In the south Indian city of Bangalore, better known as India's IT hub, Japanese auto majors such as Toyota and Honda have already established large vendor bases. In Chennai, another large southern metro city in India, Nissan and Yamaha have similar bases of MSME suppliers. The same is the case with Foxconn, which manufactures some Apple products in India.

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Redefining MSME limits to boost FDI in sector

In India MSMEs had a perverse incentive to stay small - in order to avail of various incentives and tax benefits earmarked for such companies. Sometimes, business owners went to the extent of incorporating multiple companies in the same line of business so that each firm stayed within the limit specified by the law. This was a major factor that discouraged the global suppliers of multinationals from setting up shop in India, thus, denying India access to critical technologies, processes and employment.

Earlier, MSMEs were defined by the investment they made in plant and machinery. Sitharaman has increased this limit substantially and introduced a new metric, turnover, to give these units greater freedom. Under the revised forms, the investment limit for micro industries has been raised five times to $140,000 and a turnover of $700,000; for small industries also, the investment limit has been increased 500 per cent to $1.4 million and a turnover of $7 million; and for medium industries, the investment limit has been doubled to $2.8 million and a turnover of $14 million. Then, MSMEs in the services sector, which had a lower classification threshold earlier, have now been brought at par with manufacturing companies.

Easing entry for foreign MSMEs

This redefinition of MSME classification limits will ease the entry path for foreign MSME vendors of multinationals operating in India and also those considering India as an alternative to China. The low limits and the artificial distinction between manufacturing and services companies had earlier discouraged many such inputs suppliers from setting up factories or offices in India. Some independent MSMEs also chose other locations as the low investment limits disincentivised expansion.

Costs to come down

Not only will this move to reclassify MSME limits, encourage a fresh wave of industrialisation in India, as foreign companies bring their existing vendors in foreign markets to India, it will enable multinationals bring down the cost of their end products. When multinational companies in China consider alternative investment locations in a post-Covid world, India will feature prominently in their discussions. And this definite change for MSMEs can become the crucial differentiator when they consider what each country has to offer. Facilitating this eco-system relocation - with a trusted core group of suppliers - could be India's trump card in the intense negotiations that will doubtless precede the final decision.

*Tomorrow: An analysis on how the reforms in India will help improve foreign direct investment in the food processing sector.