The recent back and forth over an order demanding timely payments to MSMEs has once again revealed the gaps in knowledge about the structure as well as the everyday functioning of these enterprises. A government order, clearly in the interest of MSMEs, has led to unforeseen repercussions, marginalizing smaller enterprises in the short term.

In this context, the importance of a systematic understanding of enterprises that fall within the MSME ambit cannot be overemphasized. A parliamentary panel was looking into separating the category of micro enterprises from the larger MSME umbrella. For now, the standing committee has recommended a regular revision of the definition every five years.

In 2020, the definition of micro enterprises was changed to include all under an annual turnover of Rs. 5 crore as micro enterprises, higher than the previous limit of Rs. 50 lakh. This was meant to discourage firms from reporting lower revenues to retain the benefits and incentives extended to micro enterprises by the state. The new definition, however, masks a significant skew in the distribution.

According to the National Sample Survey Organizations (NSSO) Unorganized Enterprise Survey 2016, 95 per cent of the enterprises surveyed reported revenues under Rs. 50 lakh per annum. Of them, 89 per cent reported an annual revenue of under Rs. 12 lakh. In the Annual Survey of Industries (ASI), more than 66 per cent of the enterprises reported an annual revenue of less than Rs. 50 lakh, and of them, 45 per cent reported annual revenues of Rs. 12 lakh.

While it is common knowledge that more than 98 per cent of the MSMEs are "micro" in size, within this category, those reporting annual revenue of Rs. 50 lakh and less (Category 1) vastly outnumber those reporting annual revenue of Rs. 50 lakh to Rs. 5 crore (Category 2). In the enterprise survey, only 2 per cent of the firms reported their revenue to be above Rs. 50 lakh per annum. In the ASI, about 30 per cent of the enterprises reported their yearly revenue as above Rs. 50 lakh per annum. Even in Prowess, a dataset exclusively for those firms that publish their annual reports thereby implying a greater degree of formality, only 40 per cent of enterprises in the category of below Rs. 5 crore, reported a yearly revenue of less than Rs. 50 lakh in 2016. No matter which way one dissects, all three measures of central tendency - mean, median and mode - tend to cluster at the extreme right quadrant of the micro category.

Since 2016, we do not have systematic data on enterprises that are not registered under the Factories Act and thereby captured under the ASI. The Udyam registration data categorizes enterprises as micro, small and medium without revealing their annual revenue. But, as per the 2022 GST data, about 63 per cent of firms belong to the category of under Rs. 50 lakh, and 30 per cent of total enterprises in the micro category belong to the under Rs. 10 lakh annual revenue segment. The GST data corroborates the rightward skewness.

Units falling within a category ought to be more similar rather than dissimilar when compared to units lying outside of the said category. In 2016, as per NSSO's 73rd round, less than two in 10 enterprises in Category 1 borrowed capital for their operations, whereas twice as many enterprises falling in Category 2 operated with borrowed capital. The median borrowings of enterprises in Category 1 was about Rs. 0.57 crore a year whereas the median borrowings in Category 2 were about Rs. 8 crore.

The formality of the workers employed shares a direct relationship with the size of the enterprise. As the size of the revenue increases so does the number of formal workers to informal workers. Notionally, for every nine informal workers there is one formal worker in enterprises clocking annual revenues below Rs. 12 lakh per annum. This ratio drops to a little under half for enterprises clocking revenue between Rs. 50 lakh and Rs. 1 crore. Those at the top end of the micro enterprise category have one formal worker for every two informal workers. Inadvertently overlooking enterprises that have low revenues invisibilises their workers.

The weakened understanding of how the largest category of enterprises operate in our economy makes it difficult to design effective interventions. Reviewing the category of micro-enterprises and further classifying enterprises within it is needed to reduce the opacity created by new definitions and the lack of systematic data.