Are SMEs & MSMEs the same or different? Here's what you need to know

. 6 min read
Are SMEs & MSMEs the same or different? Here's what you need to know

SMEs or MSMEs are important to any economy, as they help in generating employment, increase exports, and enhance economic development. The SMEs and MSMEs are the same concepts, however, through this article, we have tried to draw out the differences based on their meaning, objectives, contributions, and financing sources, by comparing Indian MSMEs with global SMEs.

Micro Small Medium Enterprises

MSMEs or Micro Small Medium Enterprises were introduced by the Indian government in 2006 under the MSMED Act of 2006. As specified in the MSMED Act of 2006, earlier MSMEs were classified into the following categories;

  • Manufacturing enterprise
  • Service enterprise

However, w.e.f. July 1, 2020, the distinction between these two sectors have been removed under the revised MSME classification. Under the revised classification, the turnover limit has also been added. Furthermore, the classification is done based on the investment made by the businesses in any fixed asset, as follows –

Revised classification

Classification 

Micro

Small

Medium 

Manufacturing and Service sector

Investment should be less than 1 crore, and Turnover should not be more than 5 crores. 

Investment should be less than 10 crores, and Turnover should not be more than 50 crores. 

Investment should be less than 50 crores, and Turnover should not be more than 250 crores. 

Small and Medium Enterprises

SMEs stands for small and medium enterprises. For every country, there is a separate definition of SME. In India, as described above, the SMEs are defined under the MSMED Act,2006 as MSMEs. We can say that the SME is a basic concept, and MSME is its definition in an Indian context. In European countries, these SMEs are classified into small and medium enterprises based on the number of employees. Therefore, if a company has less than 50 employees, it will be considered a small enterprise. The medium enterprise is the one where the number of employees is less than 250. Thus, in India, the classification conforms with the level of investment while in Europe, it depends upon the size of the workforce.

Objectives

SMEs are promoted in every country with an objective of –

  • Generating employment opportunities.
  • Encouraging entrepreneurial activities.
  • Improving the living standards of poor people.
  • Increasing the contribution of the SME sector to the GDP of the country.

Following objectives are set out by the Ministry of Micro, Small & Medium Enterprises for the MSME sector –

  • Encourage innovation in the MSME sector.
  • Increase the contribution of the MSME sector in exports of India.
  • Improvement in administrative processes.
  • Enabling employment opportunities for weaker sections of the society.

Contribution

SMEs share in other countries

  • Africa: In Africa, SMEs share in the GDP is 50%, and around 90% of the businesses fall under the SME category.
  • Japan: The contribution to GDP is more than 50% in value-added terms. SMEs account for 70% of the total employment generated in the country.
  • Pakistan: SMEs share in Pakistan's GDP was 30% in 2018. The contribution to exports was 25% and over 78% to national employment.
  • China: Almost more than 90% of the businesses in China are SMEs. Their contribution to the GDP is 60%, and they are responsible for generating 80% of the national employment.
  • United States of America: In the USA, around twenty-seven million SMEs generate 66.6% of the jobs. Their contribution to the country's GDP is approximately 50%.
  • Europe: In European countries, 70% of the jobs are created by SMEs. In 2018, there were around 25.1 million SMEs estimated to be existing in Europe.
  • Australia: Over 98% of the businesses in Australia are SMEs, and their SMEs contribution to the GDP is 33.5%.

MSMEs Share in India

MSMEs are considered to be the backbone of India's economy, as 45% of the manufacturing output, and 40% of the total exports come from the MSME sector. MSMEs also made significant contributions to employment generation in the country. The number of jobs created by micro-enterprises has increased from 3.87 lakhs in 2017 to 5.875 lakhs in 2018, i.e. a 51.6% increase in just one year. Furthermore, as stated by the head of the Ministry of MSMEs, this sector accounts for 30% of the nation's GDP.

Comparing SMEs in China with MSMEs in India.


SMEs in China


MSMEs in India

In China, the SMEs are classified based on the number of employees, annual turnover, and total assets of the enterprise. 

The MSMEs do not consider the employee factor while classifying business units into micro, small and medium enterprises. 

The Chinese government in 2019, modified the tax policies and reduced the required level of reserves that are to be maintained by these SMEs to enhance their growth. 

In India, the government introduced the LLP Act, 2008 to allow these MSME to raise funds for themselves through the capital market. Thereby, in 2012, MSME platforms were listed on BSE along with NSE. 

In 2018, the National Financing Guarantee Fund was set up to support SMEs by investing in these businesses or by providing them with credit loans. 

The government of India has launched various schemes such as MUDRA Loans, Credit Guarantee Funds Trust for Micro and Small enterprises (CGTSME), and Prime Minister's Employment Generation Programme (PMGEP) to help entrepreneurs meet their financial needs. 

Recent estimates suggested that the number of SMEs in China is around 38 million. 

In 2020, the total number of MSMEs in India was estimated to be over 63 million

Lending Institutions

The Global SME Finance Facility was established by the International Finance Cooperation to help the SMEs in meeting their financial requirements in developing countries. This facility assists the SMEs by enabling funding, alleviating risk, and offering advisory services.

In India, various selected commercial banks, NBFCs, RRBs, SIDBIs, NSIC, NEDFi, and SFBs are eligible to provide credit loans to MSMEs. New, as well as existing SMEs, are eligible to borrow. As mentioned above, the loan facilities available for MSMEs are MUDRA loan, CGTMSE, and PMEGP. Under these schemes, the loan amount ranges between minimum INR 50 crores to maximum INR 200 lakhs or 2 crores.

Conclusion

MSME is the name given to the SMEs sector in India. And as discussed earlier, each country has categorised and classified the SMEs as per their laws. Hence, the difference between these two varies in accordance with the different SMEs Laws of other countries. The article also tries to compare the share of MSMEs in India with the contribution of SMEs based in other countries.

Also read:

1) MSME – Industries that form a Foundation for a Robust Economy
2) All About Small & Medium-Sized Enterprises (SMEs)
3) What are Some Beneficial Government Policies for Small Home-Based Businesses in India?
4) How is the Government helping Small Businesses & Startups fight the financial crisis?

FAQs

Q. Are SMEs and MSMEs the same?

Ans. Yes, in India the SMEs are known as MSMEs.

Q. What is the difference between SMEs and Startups?

Ans. Initially, both startups, as well as small businesses, start small. However, the risk factor in a small business is relatively low when compared to startups as startups can be considered as an experiment that may work or may not work. Startups are considered to be visionary as their main goal is to grow into a company that can have a significant influence on society. Small businesses, on the other hand, are started with a motive to earn long term and stable revenues. Their main goal is not to grow big, but to make profits and keep their business running. You need an innovative idea for building a startup, and that's not the case with SMEs.

Q. Can a one-person company register under MSME?

Ans. Yes. Also, the registration process and fees are similar to that of other registrations made by partnership firms, LLPs, etc.

Q. What are the benefits of MSME?

Ans. 1. Loans become cheaper as interest rates are comparatively lower.
2. Tax Rebates
3. Many government tenders are open to MSMEs.

Q. What are the problems faced by MSMEs?

Ans. 1. Usage of obsolete technology.
2. Nonprofessional entrepreneurship and management.
3. Massive competition from large scale industries and imports.
4. Inadequate infrastructure, especially in rural areas.
5. Harder to achieve economies of scale.
6. Difficulty in Marketing products.