MSME – Significance & Challenges – Explained Pointwise

The Micro, Small, and Medium Enterprises (MSME) sector is a crucial pillar of the Indian economy, contributing significantly to industrial output, employment generation, and exports. In 2023-24, MSME-related products accounted for 45.73% of India’s total exports. Often termed the backbone of the economy, MSMEs are instrumental in realizing the vision of Atmanirbhar Bharat (Self-Reliant India).

What are MSMEs?

• MSMEs: These are enterprises engaged in the production, processing, and preservation of goods and commodities. These businesses are classified based on their investment in plant and machinery (for manufacturing) or equipment (for service enterprises), along with their annual turnover.
• MSME Regulation in India: MSMEs are regulated under the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. In 2007, the Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries were merged to form the Ministry of Micro, Small & Medium Enterprises.

What is the role of MSMEs in India’s economic growth?

1. Job Creation & Livelihood Opportunities:
   • MSMEs are the largest source of non-agricultural employment in India, providing jobs primarily to semi-skilled and unskilled workers.
   • Government programs like PM Vishwakarma and Mudra Yojana have expanded self-employment prospects.
   • Currently, more than 1 crore registered MSMEs employ nearly 7.5 crore people across the country.
2. Contribution to GDP & Industrial Development:
   • MSMEs play a pivotal role in India’s economic framework, accounting for around 30% of the GDP and 45% of the total manufacturing output.
   • They play a crucial role in industrial clusters by supplying raw materials and intermediates to large industries.
   • The Udyam portal has streamlined the formalization of MSMEs, promoting a more structured and organized industrial sector.
3. Rural Development: 51% of MSMEs are located in rural areas. In contrast to large corporations, MSMEs have aided in the industrialization of rural areas at a low capital cost. The sector has made significant contributions to rural socio-economic growth while also supplementing major industries.
4. Enhancing Exports & Foreign Exchange Reserves:
   • In 2023-24, MSMEs contributed 45.73% of India’s total exports, reinforcing their vital role in international trade.
   • Schemes such as the Government e-Marketplace (GeM) and the Production-Linked Incentive (PLI) program have strengthened MSMEs’ integration into global supply chains.
5. Advancing Digital & Technological Innovations:
   • Initiatives like the Open Network for Digital Commerce (ONDC) are fostering digital transformation within the MSME sector.
   • Currently, 72% of MSME transactions are conducted digitally, enhancing financial inclusion and operational efficiency.
6. Social Inclusion: According to the Annual Report of The Ministry of MSMEs (2021-22), the socially backward groups owned almost 66.27% of MSMEs. In rural areas, almost 73.67% of MSMEs were owned by socially backward groups.

   

7. Promoting Women & Social Entrepreneurship:
   • Women-led MSMEs are contributing to gender equality and economic empowerment.
   • Under the Mudra Yojana, loans worth ₹32.36 lakh crore have been sanctioned, benefiting 51.41 crore entrepreneurs, with 68% of them being women.

What are various government initiatives for MSMEs?

1. Revised Classification Criteria: To help MSMEs scale operations and access better resources, the investment and turnover limits for classification have been increased by 2.5 times and 2 times, respectively.

   

2. Udyam Registration Portal: Provides simplified, online registration giving MSMEs formal recognition, essential for availing benefits across schemes.
3. Enhanced Credit Availability:
   • Mudra Loan Scheme: It was launched in April, 2015 for providing loans up to INR 10 lakh to the non-corporate, non-farm small/micro enterprises. It encompasses 3 financing loans: Tarun (loans up to INR 10 Lakhs), Kishore (loan up to INR 5 Lakhs), Shishu (loan up to INR 50,000).
   • Credit Guarantee: The credit guarantee cover for micro and small enterprises has been increased from ₹5 crore to ₹10 crore, enabling an additional credit infusion of ₹1.5 lakh crore over five years.
   • Credit Cards for Micro Enterprises: A customized Credit Card scheme to provide ₹5 lakh in credit to micro enterprises registered on the Udyam portal.
   • Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE): It provides collateral-free credit to the micro and small enterprise sector.
   • Special Credit Linked Capital Subsidy Scheme (SCLCSS): This scheme was launched to help the enterprises in the services sector meet various technology requirements. It also has a provision to grant 25% capital subsidy for procurement of plant & machinery and service equipment through institutional credit to MSMEs owned by SC/ST entrepreneurs without any sector specific restrictions on technology upgradation.
4. Raising and Accelerating MSME Performance (RAMP): The scheme aims at strengthening institutions and governance at the Centre and State, improving Centre-State linkages and partnerships and improving access of MSMEs to market and credit, technology upgradation and addressing issues of delayed payments and greening of MSMEs.
5. Skill Development:
   • A Scheme for Promotion of Innovation, Rural Industry & Entrepreneurship (ASPIRE): The objectives of this scheme are to create new jobs, promote entrepreneurship culture in the country, and promote innovation in the MSME sector.
   • Entrepreneurship and Skill Development Programmes (ESDP): Under this, the Ministry of MSME has been organising several programmes focussing on the process of improving skills and knowledge of entrepreneurs, and enhancing the capacity to develop, manage and organise a business venture.
6. Scheme of Fund for Regeneration of Traditional Industries (SFURTI): The objectives are to organise traditional industries and artisans into clusters to make them competitive and provide support for their long-term sustainability, enhance marketability of products of such clusters, build innovative products, improve technologies etc.
7. Entrepreneurship & Inclusion:
   • Stand-Up India: Loans of ₹10 lakh–1 crore to support women and SC/ST entrepreneurs in setting up new businesses.
   • First-Time Entrepreneurs Scheme: Loans up to ₹2 crore and capacity-building for disadvantaged groups.
   • PM Vishwakarma: Focuses on enabling traditional artisans and craftspeople through training and access to markets, with special financial support.
8. Technology & Quality Upgradation:
   • MSME Sustainable (ZED) Certification Scheme: Encourages sustainable and high-quality manufacturing with incentives for adopting energy efficiency and zero-defect practices.
   • Credit Linked Capital Subsidy Scheme (CLCSS): Supports technology upgradation for MSMEs to make them globally competitive.
9. Public Procurement Policy for MSMEs: Mandates 25% of government and PSU procurement from MSMEs, giving them market access.

What are the challenges faced by the MSME Sector?

1. Lack of Formalisation: Almost 86% of the country’s manufacturing MSMEs are unregistered. Only about 1.1 crore of the 6.3 crore MSMEs are registered with the Goods and Services Tax (GST) regime, and the number of income tax filers is even lower. As a result of limited availability and access to data, as well as legacy underwriting methods, the credit requirements of Indian MSMEs have largely gone unmet.
2. Access to Technology:
   • The majority of MSMEs use outdated technology that prevents them from keeping up with the modern world. Adoption of new technology and training employees is difficult and expensive, especially in manufacturing where both physical equipment and software are involved.
   • Lack of access to IT education contributes to the technological gap.
   • Another significant factor is a lack of awareness, which reduces willingness to invest in advanced technology solutions.
3. Cumbersome Registration Process: Lengthy registration procedures and inefficient single-window clearance systems create bureaucratic hurdles for MSMEs, delaying their formalization and operational setup.
4. Lack of Awareness About Government Schemes: Many MSMEs struggle to navigate the complex landscape of government schemes due to inadequate awareness and poor coordination between the Centre and States.
5. Financial Constraints: Limited access to institutional finance, stringent collateral requirements, and high interest rates make it difficult for MSMEs to secure the funds necessary for expansion and modernization.
6. Export-Related Challenges: Poor infrastructure, inadequate trade facilitation, and difficulty in meeting Environmental, Social, and Governance (ESG) standards restrict MSME participation in global markets.
7. Labour Shortages and Skill Gaps: A lack of skilled workers, wage disparities across regions, and inefficient training centers result in low productivity and reduced competitiveness for MSMEs.

What should be the way forward?

1. Strengthening Credit Access & Financial Support:
   • Expand collateral-free lending via fintech platforms and alternative credit assessment models.
   • Mandate strict payment timelines under the MSME Samadhan portal to ensure timely dues from large corporations and government agencies.
   • Enhance the role and reach of MUDRA and SIDBI to facilitate easier credit access.
   • Develop tailored fintech solutions and promote financial literacy programs for MSMEs.
2. Reducing Compliance Burden & Regulatory Bottlenecks:
   • Implement single-window clearance for faster approvals and streamlined processes.
   • Establish state-level MSME facilitation councils for quicker grievance redressal.
   • Simplify GST registration and reduce the frequency of regulatory amendments to ensure ease of doing business.
   • Set up a dedicated MSME Coordination Council to streamline policy implementation and address sector-specific challenges.
3. Enhancing Digital & Technological Adoption:
   • Facilitate adoption of AI, IoT, and automation through MSME technology hubs.
   • Launch Digital MSME 2.0 to improve cybersecurity, cloud computing access, and digital marketing capabilities.
   • Strengthen the Credit Linked Capital Subsidy Scheme (CLCSS) to support MSMEs investing in advanced technologies.
   • Promote MSME Innovation & Incubation Hubs in collaboration with academic and research institutions.
4. Workforce Development & Skilling Initiatives:
   • Ensure uniform labor wages and introduce affordable labor insurance schemes for MSME employees.
   • Align skill training programs under Skill India, PMKVY, and NAPS to address MSME workforce needs.
   • Promote women entrepreneurs through targeted vocational training and credit linkage schemes.
5. Infrastructure Development & Cluster-Based Growth:
   • Strengthen MSME clusters under the Micro & Small Enterprises – Cluster Development Programme (MSE-CDP).
   • Encourage Public-Private Partnerships (PPPs) to set up Common Facility Centers (CFCs) for shared resources.
   • Develop MSME Industrial Parks with subsidized utilities, logistics support, and better last-mile connectivity.

Conclusion:
MSMEs can play a vital role in growth of the economy as India enters the Amrit Kaal phase. They can help in inclusive and balanced development and make India a global manufacturing hub. The Government has been supporting the MSMEs through various initiatives, the need is to focus on the implementation and realizing the outcomes.