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Q71 (IAS/2023) Economy › Industry, Infrastructure & Investment › Industrial policy reforms Official Key

Consider the following statements with reference to India : 1. According to the 'Micro, Small and Medium Enterprises Development (MSMED) Act, 2006', the 'medium enterprises' are those with investments in plant and machinery between ₹ 15 crore and ₹ 25 crore. 2. All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector. Which of the statements given above is/are correct?

Result
Your answer: —  ·  Correct: B
Explanation

The correct answer is Option 2.

Statement 1 is incorrect: Under the MSMED Act, 2006 (as per the revised criteria effective from July 1, 2020), the definition of MSMEs is based on a composite criterion of investment and turnover. For a Medium Enterprise, the investment in plant and machinery or equipment must not exceed ₹50 crore and the annual turnover must not exceed ₹250 crore. The figures mentioned in the statement (₹15 crore to ₹25 crore) do not align with the current statutory definitions.

Statement 2 is correct: According to the Reserve Bank of India (RBI) guidelines on Priority Sector Lending (PSL), all bank loans to MSMEs that conform to the definitions of the MSMED Act, 2006, qualify for priority sector classification. This includes loans for both manufacturing and service sectors, aimed at ensuring adequate credit flow to these vital segments of the economy.

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PROVENANCE & STUDY PATTERN
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Consider the following statements with reference to India : 1. According to the 'Micro, Small and Medium Enterprises Development (MSMED)…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10

Statement 1 is a standard static update (the 2020 MSME definition change) that every serious aspirant must memorize. Statement 2 is a 'Trap Breaker'—it uses the extreme word 'All', which usually signals an error, but in the specific context of RBI Master Directions for PSL, it is technically correct. This question rewards precision over blind elimination tricks.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
What are the investment-in-plant-and-machinery thresholds for micro, small and medium enterprises, and specifically for medium enterprises, under India's Micro, Small and Medium Enterprises Development (MSMED) Act, 2006?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > Micro; Small and Medium Enterprises Development (MSMED) Act 2006 > p. 236
Presence: 5/5
“As per the recent changes, the new classification/definition of MSMEs is: • Classification: ; Micro: Investment < 1 cr; Small: Investment < 10 cr; Medium: Investment < 50 cr • Classification: Manufacturing &; Micro: And; Small: And; Medium: And • Classification: Services; Micro: Turnover < 5 cr; Small: Turnover < 50 cr; Medium: Turnover < 250 cr • Classification: ; Micro: ; Small: ; Medium: • Further, the Turnover with respect to exports will not be counted in the limits of Turnover for • any category of MSME units whether Micro, Small or Medium. This will help in bringing more • units under MSME classification even if their exports are more.”
Why this source?
  • Directly lists numeric investment thresholds for enterprise categories: Micro, Small, Medium.
  • Gives the specific medium-enterprise investment cutoff (50 crore) needed to answer the question.
  • Also distinguishes investment-based classification from turnover-based limits (useful context).
Statement 2
Do all bank loans to Micro, Small and Medium Enterprises (MSMEs) in India qualify as priority sector lending?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"all bank loans to MSMEs shall qualify for classification under priority sector lending (PSL)."
Why this source?
  • This is an official RBI FAQ stating the current Master Directions explicitly.
  • It directly says that all bank loans to MSMEs shall qualify for PSL, matching the statement exactly.
Web source
Presence: 4/5
"Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated July 07, 2016 on ‘Priority Sector Lending - Targets and Classification’, bank loans to Micro, Small and Medium Enterprises, for both Manufacturing and Service sectors are eligible to be classified under the Priority Sector"
Why this source?
  • An RBI direction describing that bank loans to MSMEs in both manufacturing and services are eligible for Priority Sector classification.
  • Provides the regulatory basis for treating MSME loans as priority sector under specified norms.
Web source
Presence: 4/5
"As per the revised Priority Sector Lending guidelines by the RBI, all the loans to MSME will be classified as priority sector lending by banks."
Why this source?
  • A NABARD document summarizing RBI guidelines that states all loans to MSME will be classified as priority sector lending by banks.
  • Mentions the related sub-target for micro enterprises, indicating the treatment is part of PSL framework.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > Priority Sector Lending > p. 241
Strength: 5/5
“Regional Rural Banks, Co-operative Banks and Small Finance Banks have to allocate 75 per cent of ANDC for PSL. Priority Sector included the following categories: • a. Agriculture• b. Micro, Small and Medium Enterprises (MSMEs)• c. Export Credit• d. Education• e. Housing• f. Social Infrastructure• g. Renewable Energy• h. Others In 2020, RBI assigned PSL status also to India's Startup sector. Priority Sector Lending Certificates (PSLCs): Priority Sector Lending Certificates (PSLCs) are a mechanism to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall. This also incentivises banks with surplus PSL as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector.”
Why relevant

Lists MSMEs as one of several categories that constitute Priority Sector Lending, implying MSMEs are an eligible category but not asserting every MSME loan automatically qualifies.

How to extend

A student could infer that eligibility of MSME loans for PSL depends on whether they meet RBI's detailed PSL criteria (so they should check RBI norms or sub-target/size conditions).

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > i) Priority Sector Lending: > p. 71
Strength: 4/5
“(i) Priority Sector Lending: Priority sectors refer to those sectors of the economy which may not get timely and adequate credit in the absence of this special scheme. Priority sector guidelines do not lay down any preferential rate of interest for priority sector loans. Typically, these are small value loans to those sectors of the society/economy that impact large segments of the population and weaker sections, and to the sectors which are employment intensive such as agriculture and small enterprises. Scheduled Commercial Banks (SCBs) having any shortfall in lending to priority sector are allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD/NHB/SIDBI/ MUDRA Ltd.”
Why relevant

Explains that 'priority sectors' are defined categories that typically cover small-value, employment-intensive loans, but notes guidelines do not prescribe preferential rates—suggesting PSL status is about classification, not automatic for every loan.

How to extend

One could use this to reason that classification rules (loan size, purpose, borrower type) determine PSL eligibility, so not all MSME lending must be PSL.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 1. On-lending model: > p. 72
Strength: 4/5
“Onward lending by registered Non-Banking Finance Companies (NBFCs) including Micro Finance Institutions (MFI) for the various priority sectors will be considered as Priority Sector Lending. RBI has done the above changes in order to boost credit to the needy segment of borrowers. Under the revised on-lending model, banks can classify only the fresh loans sanctioned by NBFCs out of bank borrowing as priority sector lending. Bank credit to NBFCs for 'On-Lending' will be allowed up to a limit of five percent of individual bank's total priority sector lending on an ongoing basis.”
Why relevant

States specific conditions for on-lending by NBFCs to be counted as PSL (only fresh loans sanctioned by NBFCs out of bank borrowing, and a cap), showing PSL treatment can be conditional and limited.

How to extend

Use this as an example that PSL recognition often has qualifying conditions — therefore MSME loans may also need to meet conditions to qualify.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
Strength: 4/5
“2015, RBI granted license to 10 applicants for Small Finance Banks which is a step in the direction of furthering the financial inclusion.• The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.• There will not be any restriction in the area of operations of small finance banks.• The small finance banks will be required to extend 75% of its total credit to the sectors eligible for classification as priority sector lending (PSL) by the RBI.• At least 50% of its loan portfolio should constitute loans of up to Rs25 lakhs• Both payment banks and small finance banks are niche or differentiated banks i.e., specialized in certain banking functions and not universal.”
Why relevant

Notes small finance banks must extend a large share of credit to sectors eligible as PSL and that at least 50% of their portfolio should be loans up to Rs25 lakhs — implying size thresholds affect PSL classification.

How to extend

A student could check whether MSME loans above/below certain size thresholds are treated differently for PSL, suggesting not all MSME loans automatically qualify.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > egin{array}{c|c|c|c|c} \\hline extbf{2015} & extbf{0} & extbf{0} \\[1ex] \ \hline \ \end{array} > p. 252
Strength: 3/5
“Priority Sector Lending by banks in India constitutes the lending to • (a) Agriculture • (b) Micro and Small enterprises • (c) Weaker Sections • (d) All of the above • 35. Select the correct answer using the codes given below: • (a) 1 and 2 only • (b) 2 only • (c) 1 and 3 only • (d) 1, 2 and 3 • 37. The Reserve Bank of India regulates the commercial banks in matters of • 1. liquidity of assets • 2. branch expansion • 3. merger of banks • 4. winding up of banks”
Why relevant

Reiterates the standard PSL categories (including micro and small enterprises) in a question format, which underscores that PSL is a defined list rather than an all-encompassing label.

How to extend

This supports the approach of consulting the defined PSL list and sub-targets to determine which MSME loans count.

Pattern takeaway: UPSC loves testing 'Definitions' (What is a Medium enterprise?) alongside 'Scope' (Does it cover all loans?). Numeric thresholds in Economy are often swapped with arbitrary numbers to create wrong statements. If a number looks 'odd' or 'random' (like 15-25 Cr) compared to standard policy round numbers (10, 50, 100), it is likely incorrect.
How you should have studied
  1. [THE VERDICT]: Mixed Bag. S1 is a Sitter (Standard Book Fact). S2 is a Technical Trap (RBI Circulars). Source: Vivek Singh / Nitin Singhania + RBI FAQs.
  2. [THE CONCEPTUAL TRIGGER]: Industrial Policy (MSME Reforms 2020) + Banking Regulations (Priority Sector Lending).
  3. [THE HORIZONTAL EXPANSION]: Memorize the New MSME Matrix: Micro (Inv<1Cr, Turn<5Cr), Small (Inv<10Cr, Turn<50Cr), Medium (Inv<50Cr, Turn<250Cr). PSL Targets: 40% for Domestic SCBs, 75% for RRBs/SFBs. PSL Categories: Ag, MSME, Export Credit, Education, Housing, Social Infra, Renewable Energy.
  4. [THE STRATEGIC METACOGNITION]: When a major definition changes (like the 2020 MSME revision), the *exact numeric thresholds* remain high-yield for 3-4 years. For Banking statements, do not blindly eliminate 'All'—check if the regulatory mandate (RBI) is universal for that specific category.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Investment-based classification of MSMEs
💡 The insight

Specifies the investment thresholds that determine whether an enterprise is micro, small or medium.

High-yield for policy and economy questions: knowing these numeric cutoffs is essential for questions on MSME eligibility, benefits, and policy impact; it connects to credit schemes, subsidies and regulatory treatment for enterprises.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > Micro; Small and Medium Enterprises Development (MSMED) Act 2006 > p. 236
🔗 Anchor: "What are the investment-in-plant-and-machinery thresholds for micro, small and m..."
📌 Adjacent topic to master
S1
👉 Turnover-based classification & export turnover exclusion
💡 The insight

Turnover limits are an alternate basis for classifying MSMEs and export turnover is excluded from those limits.

Important for distinguishing manufacturing vs services classification and for understanding how exports affect MSME status; helps answer comparative and policy-interpretation questions on classification criteria and benefit eligibility.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > Micro; Small and Medium Enterprises Development (MSMED) Act 2006 > p. 236
🔗 Anchor: "What are the investment-in-plant-and-machinery thresholds for micro, small and m..."
📌 Adjacent topic to master
S1
👉 Udyam registration and self-declaration mechanism
💡 The insight

Registration provides the operational route for enterprises to be identified and classified under MSME rules via a self-declared one-page form.

Practically important for questions on implementation of MSME policy—connects classification to administrative procedures, access to schemes, and official recognition of enterprises.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > Role of government in the promotion of MSME sector: > p. 235
🔗 Anchor: "What are the investment-in-plant-and-machinery thresholds for micro, small and m..."
📌 Adjacent topic to master
S2
👉 Priority Sector Lending categories
💡 The insight

Priority sector comprises specified sectors such as agriculture, MSMEs, export credit, education, housing and social/renewable infrastructure.

High-yield for banking and economy questions: knowing which sectors are classified as priority sector is essential to answer questions on credit allocation, PSL targets, and related regulatory instruments. It connects to topics on financial inclusion, credit policy and lending priorities and enables tackling questions on classification, eligibility and sectoral lending responsibilities.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > Priority Sector Lending > p. 241
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > i) Priority Sector Lending: > p. 71
🔗 Anchor: "Do all bank loans to Micro, Small and Medium Enterprises (MSMEs) in India qualif..."
📌 Adjacent topic to master
S2
👉 PSL allocation mandates for specialised banks
💡 The insight

Certain bank types (e.g., Regional Rural Banks, Co-operative Banks, Small Finance Banks) have explicit high-percentage obligations to lend to sectors eligible as priority sector.

Important for questions on bank regulation and financial inclusion: understanding which banks have mandatory PSL quotas and portfolio composition requirements helps answer policy and institutional questions about targeted credit delivery and regulatory obligations. It links to banking structure, niche banks, and credit distribution patterns.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > Priority Sector Lending > p. 241
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
🔗 Anchor: "Do all bank loans to Micro, Small and Medium Enterprises (MSMEs) in India qualif..."
📌 Adjacent topic to master
S2
👉 On-lending treatment for PSL (NBFCs/MFIs and refinance institutions)
💡 The insight

On-lending by NBFCs and MFIs for priority sectors can be classified as priority sector lending under specified conditions; refinance institutions support onward lending to MSMEs.

Crucial for questions on indirect credit flow and PSL accounting: mastering how on-lending and refinance are treated clarifies whether loans routed through intermediaries count towards PSL targets. This concept intersects with NBFC regulation, refinance institutions (SIDBI, MUDRA) and enables answering questions on classification of indirect lending and PSL eligibility rules.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 1. On-lending model: > p. 72
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 15. Small Industries Development Bank of India (SIDBI): > p. 84
🔗 Anchor: "Do all bank loans to Micro, Small and Medium Enterprises (MSMEs) in India qualif..."
🌑 The Hidden Trap

PSL Sub-targets: While 'All' MSME loans qualify for PSL, there is a specific sub-target of 7.5% of ANBC specifically for 'Micro Enterprises'. Also, know the 'TReDS' platform (Trade Receivables Discounting System) which is mandatory for certain companies to aid MSME liquidity.

⚡ Elimination Cheat Code

The 'Arbitrary Number' Heuristic: In Statement 1, the range '₹15 crore to ₹25 crore' is suspicious. Statutory limits are usually clean, round numbers (e.g., 10, 20, 50, 100). A specific, narrow slice like 15-25 is rarely a legal definition for a broad category like 'Medium'. This signals S1 is wrong.

🔗 Mains Connection

Mains GS-3 (Industrial Growth): Connect the MSME definition change to the Economic Survey concept of 'Dwarfism'. The old low limits forced firms to stay small to keep benefits; the new higher limits (up to 250Cr turnover) encourage firms to grow without losing PSL/subsidy support.

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Consider the following statements about the Indian Institute of Entrepreneurship (IIE) : 1. The IIE was established in 1999 in Guwahati. 2. The main aim of the institute is to provide training, research and consulting activities for small and micro enterprises. Which of the statements given above is/are correct ?

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