While the sector is flooded with schemes, what it lacks is a coherent system. The time has come to move from incentives to deep, structural reforms that reflect the very different realities of MSMEs.
Credit access must shift from traditional collateral to alternate credit scoring methods using payment history, utility bills, or GST invoices. (Source: prhandout)
India’s Micro, Small, and Medium-Sized Businesses (MSME) sector is vast, diverse, and vital to economic growth. Yet the regulatory landscape remains fragmented instead of providing a holistic coverage.
MSMEs in India have long been hailed as the foundation of the country's economy. They work across a wide range of industries and employ millions in different formats, ranging from high-potential exporters in industrial clusters to family-run retail establishments in small towns. But beneath this potential lies a policy paradox. While the sector is flooded with schemes, what it lacks is a coherent system. The time has come to move from incentives to deep, structural reforms that reflect the very different realities of MSMEs.
Take the example of microbusinesses having a turnover of less than or equal to Rs 5 crores. These are at the base of the pyramid. According to government data, these make up about 97% of India's registered MSMEs, making them the vast majority. These companies are usually tiny, informal, and firmly established in their communities; they employ few people and operate on low margins. Microbusinesses, which range from neighbourhood kirana shops to home-based tailors and food processors, are essential to many homes.
Yet they remain on the margins of formal economic support. Most micro entrepreneurs struggle with access to finance, mainly because they lack collateral or formal credit history. Many are unaware of government schemes simply because the information doesn't reach them. The burden of compliance—be it registering a business or filing GST—feels out of reach for someone running a shop on their own. In addition, micro enterprises pose an economic challenge for a country of our size. Moreover, often they are an environmental threat. According to SIDBI’s ‘Understanding Indian MSME Sector’ report, MSMEs contribute 10–15% of industrial emissions, making them an important player in India's net-zero journey.
Reduce friction
To support this segment, reforms must focus on enhancing the ease of doing business. Regulatory systems need to go digital, but in a way that works for someone with a basic phone and limited literacy. We need mobile-first platforms in local languages that make registration and tax filing as easy as using a digital wallet.
Credit access must shift from traditional collateral to alternate credit scoring methods using payment history, utility bills, or GST invoices. Awareness campaigns must go local—using panchayats, Self Help Groups (SHGs) and cooperative banks to reach the last-mile entrepreneur. India can take inspiration from countries like Singapore, where even the smallest enterprises can access support through a single, unified digital portal.
Moving up the ladder are the small enterprises with turnover greater than Rs 5 crore and less than or equal to Rs 50 crore. Though they make up a much smaller share—around 2.7%—they play a crucial role in supplying goods and services both locally and nationally. Small enterprises are often formalised, employ more people, and serve as suppliers to larger industries. But they are caught in a difficult spot. They’re too big to benefit from schemes meant for micro enterprises, yet too small to enjoy the privileges that large corporations receive.
For small businesses, the main hurdles are access to markets and the high cost of compliance. Exporting remains a distant dream for most, not because they lack quality, but because they lack the support system—standards, certifications, trade fair access—that exporters need. At home, tax regulations and energy costs eat into margins, and fragmented supply chains make scaling difficult. Policy must aim to integrate these small firms into the larger economy.
Simplifying tax procedures, building digital B2B platforms, and expanding vocational training are crucial steps. Encouraging the adoption of green technologies through schemes like the ZED (Zero Defect Zero Effect) certification is also key, not just for sustainability, but for improving quality and competitiveness.
Germany’s Mittelstand (SME enterprises) stands in sharp contrast to India’s MSMEs. Though fewer in number, these mid-sized, often family-owned firms play a major role in Germany’s economy, contributing nearly half of its GDP and employing over 60% of its workforce. Their strength comes from steady investment in skills, technology, and export networks.
India, on the other hand, has over 5.93 crore registered MSMEs, the majority being micro enterprises that struggle with formal credit, scaling, and market access. The difference is not just in numbers—it’s in the kind of support these businesses receive. Finally, there are the medium enterprises with a turnover greater than Rs 50 crore and less than or equal to Rs 250 crore. Though they form a mere 0.3% of the MSME sector, their potential is anything but small. These firms are typically capital-intensive, more structured, and have a much higher capacity to scale, innovate, and generate employment. But policy design has failed them.
India needs a specific plan for medium-sized businesses to deal with this. This covers global market integration, R&D support, and quicker clearances. A distinct and well-defined policy framework that acknowledges the unique requirements of this group would be an excellent place to start. Japan's history demonstrates that, with robust R&D assistance, logistics infrastructure, and government facilitation, medium-sized businesses can prosper internationally.
The policy paradigm must shift if India hopes to make its MSME sector globally competitive. Short-term incentives must give way to long-term capability building, from considering MSMEs as a monolithic entity to creating rules that consider their variety. The focus should be from ministry-formulated designs to implementable operational systems.
What India’s MSME policy needs right now is a subtle shift in our perspective on business, not just another plan. There is a need for a plan that is scalable everywhere, local where it must be, and digital where it must be. Only then will MSMEs be able to fulfil their potential as pillars of a more resilient and inclusive India, not only as drivers of economic growth.
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