Micro, Small and Medium Enterprises (MSMEs) hold the key to India’s ambition of becoming a USD 30 trillion economy and a global manufacturing hub in the next two decades.
So, MSMEs are not only desirable, but they are essential to building a robust, self-reliant, and inclusive economy.
Yet, these small units are vulnerable to economic upheavals. This was evident during the COVID-19 pandemic. In a different time now again, this sector is exposed to the steep 50 per cent US tariff, making their products uncompetitive in the lucrative American share. Given that MSMEs operate on thin capital, they don’t have the wherewithal to stand against these odds, threatening thousands of jobs.
MSMEs form the backbone of India’s economy, contributing nearly 30 per cent to the national GDP, over one-third of manufacturing output, and almost half of total exports. With more than 63 million enterprises employing about 120 million people, MSMEs serve as the foundation for entrepreneurship, local livelihoods, and inclusive growth.
While they account for a substantial share of output and exports, persistent challenges around finance, skills, technology, and infrastructure limit their global competitiveness. A holistic approach—strengthening clusters, upgrading skills, providing affordable finance, and rethinking policy frameworks—is essential.
MSMEs are at a critical juncture. With the right interventions, they can transition from informal, small-scale survival units into globally competitive enterprises that drive innovation, exports, and inclusive prosperity.
Despite their enormous footprint, MSMEs continue to face structural barriers that hinder their global competitiveness. Strengthening this sector is not only essential for domestic economic resilience but also for ensuring India’s effective participation in global value chains (GVCs).
Some of the issues that weaken Indian MSMEs’ ability to compete at scale are as follows:
Nearly 90 per cent of MSMEs operate informally, limiting their access to finance, government schemes, and global markets. While initiatives such as the Udyam Registration Portal have brought millions of enterprises into the formal fold, a significant share of micro-enterprises remains outside formal networks due to regulatory costs, lack of awareness, and cumbersome compliance burdens.
Despite recent growth in credit flow, a Small Industries Development Bank of India (SIDBI) study has estimated that MSMEs have an addressable credit gap of about 24 per cent or around Rs. 30 lakh crores. Collateral requirements, high transaction costs, and banks’ risk-averse approaches force many enterprises to rely on informal lenders charging exploitative interest rates. Credit Guarantee schemes and the role of NBFCs are growing, but systemic reforms are needed to make affordable finance universally accessible.
A large portion of India’s workforce lacks vocational or technical training. MSMEs struggle to recruit skilled workers, particularly in technology-intensive sectors. This mismatch reduces productivity and limits their ability to innovate or climb higher value chains.
Most small firms depend on outdated technology, constrained R&D spending, and weak digital infrastructure. Accessing advanced tools such as artificial intelligence, automation, or quality certification systems remains difficult due to high costs and a lack of technical know-how.
MSMEs often produce low-value, low-differentiation products with limited branding. Without strong marketing, market intelligence, and diversification, their products remain vulnerable to price fluctuations and fail to capture premium global markets.
While GST has improved transparency, compliance costs are high relative to MSME capacities. Proprietorships—over 80 per cent of MSMEs—contribute little to GST revenue, reflecting inequities and inefficiencies in the tax framework.
Many MSMEs, especially in rural and semi-urban areas, lack reliable electricity, logistics, and storage facilities. High transport costs, poor connectivity, and weak digital networks prevent them from scaling efficiently.
India’s MSME ecosystem is dominated by micro-enterprises, with very few firms transitioning into small and medium categories. This “missing middle” results in weak scale economies and limited job creation, compared to global peers.
To enhance MSME competitiveness, the government and industry must build institutions for collaboration, such as research centres, industry associations, and skill councils that support innovation and knowledge exchange.
MSMEs need to move from low-value upstream activities to higher-value downstream production (e.g., from raw textile processing to garment design and branding).
MSMEs’ role in global supply chains can be enhanced by meeting quality standards, improving logistics, and adopting digital solutions.
Efforts should be made for the development of dynamic, modular, and sector-specific training programs to align workforce skills with industrial needs.
Regions like Surat, Ludhiana, and Tirupur show potential for global competitiveness in textiles and apparel. These very centres are now facing challenges due to US-tariff-related uncertainties. Besides liquidity support and a moratorium on loan repayments to tide over the crisis, policies should focus on design, branding, and downstream value addition.
Similarly, in the automotive sector, clusters in Pune, Gurgaon, and Rewari require a shift from dependence on large firms toward independent innovation and R&D. In chemicals, enterprises face skilled labour shortages and regulatory complexity. Streamlined approvals and university partnerships can drive growth.
In pharmaceuticals, regulatory compliance, quality assurance, and R&D collaboration are essential to strengthen exports. In food processing, linking farmers with processors, upgrading cold chains, and branding regional products can unlock huge export potential, particularly in underutilised eastern states.
National and state-level policies often reveal weak implementation, low awareness, and limited stakeholder engagement.
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) facilitates credit for MSMEs. However, it currently operates without the desired level of regulatory oversight, leading to challenges in balancing fund availability with the financial discipline required for sustainable growth. Bringing the CGTMSE under a robust regulatory authority could help mitigate these concerns.
Non-Banking Financial Companies (NBFCs) have emerged as a vital source of credit for MSMEs, especially micro-sized enterprises in remote areas. SIDBI should expand its balance sheet to provide more extensive wholesale financing to NBFCs.
To bridge this skills gap, forging partnerships between government bodies, educational institutions, and industries can prove invaluable. These collaborations can create new, dynamic curricula and training modules, including shorter, flexible programs, that meet the evolving needs of MSMEs.
Similarly, AI can transform MSMEs, but barriers persist—lack of data law awareness, limited expertise, and high costs. Awareness campaigns, collaborative platforms, and targeted financial aid like grants, subsidies, and cloud-based pay-as-you-go tools can make AI adoption affordable, accessible, and compliant, helping MSMEs bridge skills and technology gaps.
On the taxation side, delayed payments beyond 180 days trigger input tax credit (ITC) reversal, causing working capital blockages for MSMEs. This adds financial strain and forces them to reclaim ITC later, increasing compliance and cash flow challenges. This needs to be addressed on priority.
Among other measures, the government should invest in logistics, power, and digital infrastructure tailored to rural MSMEs. It should also encourage shared industrial spaces to cut operational costs.