Change in MSME definition: Does it help the sector?

The union cabinet recently approved a change in the definition (see Table 1) of Micro, Small and Medium enterprises (MSME), to base it on their turnover as against investment in fixed assets. The Micro, Small and Medium Enterprises Development Act, 2006 will be amended accordingly to reflect the new definition. A change in definition of MSME assumes significance as it is used to provide a number of incentives such as capital, interest and technology/market promotion subsidy by the central and state governments.

Table 1: MSME definition
EnterpriseEarlier definitionNew definition
MicroManufacturing enterprises: Investment in plant and machinery< INR 25 lakhs
Service enterprises: Investment in equipment/machinery<INR 10 lakh
Annual Turnover< INR 5 crore
SmallManufacturing enterprises:Investment in plant and machinery between INR 25 lakhs and INR 5 crore
Service enterprises:Investment in equipment between INR10 lakhs and INR 2 crore
Annual turnover between INR 5 crore and INR75 crore
MediumManufacturing enterprise: investment in plant and machinery between INR 5 crores and 10 crore
Service enterprises: investment in equipment between INR  2 crores and 5 crores
Annual Turnover between INR 75 croreand 250 crore
Note: Turnover of enterprises is likely to be calculated based on GST returns

The new classification may result in many medium enterprises being classified as small enterprises (or small getting classified as micro) based on their turnover. Such reclassification would be positive for enterprises in sectors such as engineering, machine fabrication, apparel, construction contractors etc, where a large number of MSMEs are vendors to public sector enterprises (PSUs). These PSUs reserve 20 per cent of their procurement requirements for micro and small enterprises.

Further, a turnover based definition coupled with incentives for filing GST will encourage MSMEs to file taxes and transact through bank accounts, resulting in improved information availability on the sector for the policy makers. The GST filings of 2017-18, already show an increase of almost 50 per cent in the number of unique indirect tax payers.

The most significant impact though would be on state governments who would now have to revise their industrial policies that currently offer incentives to new enterprises based on their investment in plant and machinery. These policies could broadly be divided into two categories:

  • Capital investment subsidies (subsidies on machinery, building); and
  • Interest related subsidies where loans given to micro and small enterprises attract lower interest rates.

For example Government of Telangana offers Interest subsidy under Pavala vaddi on the term loan taken for fixed asset by new micro and small enterprises. The amount of loan is currently governed by the investment guidelines as defined by the MSME Development Act, 2006. This scheme may have to beredesigned to reflect the new MSME definition. Similarly, central government schemes such as PMEGP (Prime Minister Employment Generation Programme) that provide subsidy to micro and small enterprises will also have to be revised accordingly.

As such, the change to a more transparent mechanism based on turnover is a welcome step as it would make it easier for MSMEs to grow and transition from micro to small and medium enterprises. Further, unlike earlier definition which incentivised enterprises to remain small (as the incentive decreased with the increase in fixed assets), the new definition would likelystimulate investment in the sector.

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Precast Concrete – Growing Business Opportunity

Precast Building elements refer to building parts such as walls, columns, beams, slabs that are made in the factory and transported to the construction site, as against conventional method of onsite construction. These can be used for all types of construction including high rise residential buildings, commercial projects, villas etc. Precast walls can be used for factories, warehouses and also as fences, partition walls etc. Since precast concrete elements are made in a factory, construction is faster and more precise as compared to onsite construction.

Precast is not new in India, it has been well adopted in civil structures such as tunnels, bridges, flyovers and underpasses. Usage of Precast concrete products for commercial & residential construction has started getting acceptance over the past 5 years, mostly in IT offices, factories and hospitals.

Precast technology requires considerable initial capital expenditure (for the factory and equipment) and is most suitable/viable for projects where a large amount of quality construction has to be delivered quickly. Potential for use of precast elements on a large scale seems to be emerging from the growth of affordable housing[1], which is attracting a number of real estate developers as well as financial institutions that are looking to lend to affordable home buyers. The sector has got an impetus from Pradhan Mantri Avas Yojana, which was launched in November 2015 and aims to build 2 crore houses by 2022. The GOI has provided several incentives including the status of infrastructure sector for easy access to funding, 100% tax deduction on profits on affordable housing projects for the developer and credit linked subsidies for the home buyers.

Who are the key players?

The players in the precast market are of two types – builders who have invested in this technology for their captive usage and construction contractors who provide turnkey solutions. Some of the real estate developers who have set up their own precast plants include Supertech, Amrapali, and Sobha Developers etc. The contractors that provide precast related turnkey solutions are PRECA solution, Teemage Precast, KEF Infra, VME Precast, L&T etc.

Markets such as Bangalore, Noida, and Chennai have seen early adoption of the precast technology. Hyderabad is also picking up and two new precast plants have been set up there by the local construction industry.

What is the manufacturing process?

The process starts with the preparation of concrete in the batching plant, followed by casting on the specially prepared bed, curing and transportation to the site. Manufacturing can be semi/fully automated depending upon the capital investment (See Figure 1).

Figure 1: Manufacturing process

The machinery required for the plant setup includes batching plant, pallet/bed, shuttering profiles, concrete distributor, oscillator (for compacting concrete), plotting & cleaning unit (can be done manually), concrete smoothening device, cranes, automation and miscellaneous equipment. The machinery is provided by a number of international companies such as Elematic (Finland), Sommer Precast, Weckenmann (both Germany) and Spiroll (UK) that have offices in India.

How much Capital is required and what will be the profitability?

The capital required for a production capacity of 600 sq.m/shift including investment in plant and machinery and working capital would be over Rs. 30 crores. The overall profitability & return on investment would be contingent on the entrepreneur’s ability to secure regular orders. In order to breakeven, the entrepreneur should be able to run the plant at 50% capacity or construct around 4-5 lakh sq.ft. per annum.

What are the key challenges?

Despite its merits, there are some challenges for entrepreneurs looking to enter the Precast industry.

  1. Given the large amount of capex required to set up a precast unit, it is viable when the construction volumes are large and hence the entrepreneur/construction contractor should be addressing a large market or have some anchor customers that would allow at least 50% utilisation of the capacity.
  2. Unlike other building materials such as light weight bricks, panels etc., precast material is not sold off the shelf. Therefore the company that is contemplating entering the precast market should also have design and construction expertise.

How can we help?

We can help you start a precast building elements manufacturing unit through a number of services including market research, techno economic feasibility assessment and assistance in raising funds. In case you are looking to acquire an existing precast/building material unit, we can assist you in identifying such a company and in the process of acquisition.

[1]Houses with 30 square meters carpet area in the four metro cities and 60 square meters carpet area in the rest of the country

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