MSMEs as Pillars of Economic Prosperity

India's MSME sector is experiencing robust growth, with credit exposure increasing 13% year-on-year to reach significant levels, driven by strong demand from new borrowers who constitute nearly half of all fresh originations. Despite this encouraging trajectory, MSMEs continue to grapple with persistent challenges including limited access to formal credit, regulatory complexities. India must urgently address these systemic issues through comprehensive policy reforms and streamlined business processes to ensure the MSME sector can truly become the backbone of sustainable economic development. 

How India's MSME Sector is Driving India's Economic Growth? 

• Employment Generation and Job Creation: MSMEs are the largest employment provider in India, contributing to nearly 60% of the workforce.  
  • With an estimated 7.34 crore MSMEs, the sector plays a pivotal role in absorbing India’s young, expanding labor force.  
  • The Prime Minister’s Employment Generation Programme (PMEGP) alone supported 89,118 enterprises in 2023-24, creating over 7.1 lakh jobs.  
• Boost to Exports and Global Trade: The MSME sector is a major driver of India’s export performance, contributing to 45.79% of India’s total exports as of 2024-25.  
  • Their increasing participation in global trade is vital for improving India’s trade balance and strengthening its position as a global manufacturing hub.  
  • A key policy initiative, the Public Procurement Policy, has boosted MSMEs’ access to government procurement, fostering export capabilities. 
• Financial Inclusion and Credit Accessibility: Access to credit remains one of the most pressing issues for MSMEs, but recent government initiatives like Mudra Yojana and Credit Guarantee Fund (CGTMSE) are bridging the gap.  
  • The MUDRA loan scheme has disbursed ₹5.41 lakh crore (FY24) to MSMEs, empowering businesses to scale and innovate.  
    • By offering collateral-free loans and expanding credit guarantees, these measures provide MSMEs with much-needed liquidity. 
• Digital Transformation and Technological Adoption: The sector is undergoing a digital transformation, crucial for improving efficiency and market reach.  
  • About 72% of MSMEs now prefer digital payments, enhancing transparency and reducing transaction costs.  
    • The UPI ecosystem processed transactions worth ₹23.48 lakh crore in 2024, demonstrating the sector's growing digital engagement and its potential for future growth. 
• Government Support and Policy Reforms: The government has significantly increased its allocation for MSMEs, with a ₹23,168 crore budget allocation in FY26 to support growth.  
  • Reforms like raising investment and turnover limits, as well as introducing the PM Vishwakarma scheme, offer tailored support to artisans, especially women and rural entrepreneurs.  
• Regional Development and Inclusive Growth: MSMEs are critical in promoting regional development, especially in rural and remote areas.  
  • Schemes like SFURTI (Scheme for Fund Regeneration of Traditional Industries) have transformed traditional sectors, enhancing the productivity of rural artisans.  
  • Furthermore, Jammu & Kashmir alone generated 3.56 lakh jobs under PMEGP, significantly reducing regional disparities. 
• Sustainability and Green Initiatives: Sustainability is becoming central to MSME growth, with green technology adoption and eco-friendly manufacturing gaining momentum.  
  • Atmanirbhar Bharat has encouraged MSMEs to focus on green manufacturing processes, including clean tech initiatives in solar energy, EV batteries, and wind turbines.  
  • The National Manufacturing Mission has a focus on clean tech, such as solar PV cells and EV batteries. 

What are the Key Issues Associated with India's MSME Sector? 

• Limited Access to Formal Credit: One of the most pressing issues for MSMEs is their limited access to formal credit, which constrains their ability to scale.  
  • While schemes like Mudra Yojana and CGTMSE have provided significant financial support, a substantial number of MSMEs still rely on informal lending sources.  
    • Only 2.5 crore MSMEs (out of 6.3 crore) have accessed formal credit sources. 
• Regulatory and Compliance Burden: The MSME sector faces significant regulatory and compliance challenges, particularly for small enterprises.  
  • The complexity of tax, labor, and environmental regulations often burdens MSMEs with high compliance costs and procedural delays.  
    • These challenges are especially severe in manufacturing sectors like auto components and pharmaceuticals, where stringent standards are required. 
  • MSMEs report high compliance costs as a barrier to productivity and competitiveness in global markets. 
• Skilled Labor Shortage: The shortage of skilled labor remains a major bottleneck, especially in labor-intensive sectors such as garments, food processing, and defense equipment.  
  • Despite efforts to increase vocational training, the mismatch between industry needs and available skills limits productivity and innovation in MSMEs.  
  • About 25% of MSMEs cite a skilled labor shortage as a significant challenge, particularly in sectors like garments and food processing. 
    • PMEGP and other schemes aim to address this, but skill gaps remain substantial, hindering MSME growth. 
• Technological Gap and Digital Divide: While MSMEs are increasingly adopting digital payments, they are still behind in embracing advanced technologies like Industry 4.0, AI, and automation.  
  • The lack of technological infrastructure, along with limited access to affordable R&D, hampers MSMEs from improving product quality and competitiveness. 
  • Though 90% of MSMEs have adopted digital payments, only 18% use digital lending platforms and just 13% actively use digital marketing or e-commerce to reach customers 
  • Limited investment in R&D and technological infrastructure hinders MSMEs' ability to scale efficiently. 
• Market Access and Competition: MSMEs struggle to access larger, high-value markets due to competition from bigger players and a lack of marketing expertise.  
  • This is particularly evident in the export sector, where despite strong performance,  
  • MSMEs overall contribute 45.79% to India’s exports, yet many face stiff competition from global giants. 
    • Udyam Portal registrations reached 5.7 crore, but the sector's reach in international markets remains limited. 
• Inadequate Infrastructure and Logistics: Infrastructure bottlenecks, including poor roads, power supply, and unreliable logistics, continue to affect MSME productivity. 
  • These issues are most prominent in rural and remote areas, where MSMEs face challenges in transportation and raw material procurement, significantly increasing operational costs. 
  • With India’s logistics costs estimated at 14–18% of GDP (Economic Survey 2022–23) — nearly double the global benchmark of 8% — systemic inefficiencies have become a major concern. 
• Gender Disparities in Entrepreneurship: Although the government has introduced initiatives to support women entrepreneurs, they still face disproportionate challenges compared to their male counterparts, including limited access to credit, market linkages, and business networks.  
  • Women-led MSMEs constitute 26.2% of total MSME enterprises but face higher credit access challenges than men. 
  • According to ASUSE 2023–24, women-led MSMEs now account for 26.2% of proprietary enterprises. Although 76% have credit access, 41% cite limited financing and intense competition as key barriers to their growth. 

What Measures can India Adopt to Enhance the Effectiveness of India’s MSME Sector?  

• Simplification of Regulatory Framework: India must streamline regulatory processes to reduce the compliance burden on MSMEs.  
  • This involves simplifying tax filing, reducing procedural delays, and creating a single-window clearance system.  
  • Introducing one-click compliance platforms and leveraging digital tools for routine government interactions will help MSMEs comply more efficiently. 
• Strengthening Financial Support through Digital Lending: The accessibility and affordability of credit remain major hurdles for MSMEs.  
  • Expanding digital lending platforms and ensuring greater participation of NBFCs (Non-Banking Financial Companies) in providing loans would empower MSMEs, especially those in remote areas.  
  • Offering collateral-free loans and expanding the Credit Guarantee Fund will provide financial flexibility, while also encouraging innovation in MSMEs. 
• Skilling and Workforce Development Initiatives: Filling the skills gap is essential for MSMEs to remain competitive.  
  • The government should integrate Industry 4.0 technologies, including automation, AI, and data analytics, into vocational training programs.  
  • Partnering with private sector companies and educational institutions to create customized skill development programs will align the workforce with the evolving needs of the sector.  
    • This will help improve productivity and innovation in MSMEs. 
• Promotion of E-commerce and Digital Marketing for MSMEs: To enhance market access, MSMEs should be encouraged to adopt e-commerce platforms and digital marketing tools.  
  • Providing incentives for MSMEs to set up online stores or integrate with large digital marketplaces like GeM (Government e-Marketplace) can help MSMEs reach broader markets, both domestically and internationally.  
  • Support for digital training and the development of user-friendly online platforms is critical for this transformation. 
• Enhanced Infrastructure Development: Addressing the infrastructure bottlenecks faced by MSMEs, particularly in rural areas, is key.  
  • The government should prioritize developing industrial parks, logistics hubs, and common facility centers (CFCs) in underserved regions.  
  • Additionally, improving transportation networks and power supply reliability will reduce operational costs and improve the competitiveness of MSMEs in global markets. 
• Focused Policy for Women Entrepreneurs: There is a need for targeted schemes that provide financial incentives, networking opportunities, and mentorship to women entrepreneurs in the MSME sector.  
  • This could include increased credit guarantees, specialized loan products, and capacity-building programs to overcome the unique challenges faced by women.  
  • Empowering women entrepreneurs can significantly contribute to economic inclusivity and the overall growth of the sector. 
• Incentivizing Green and Sustainable Practices: India should encourage MSMEs to adopt green technologies and sustainable production methods by providing financial incentives and facilitating easy access to environmental credits.  
  • Policies aimed at import substitution, such as support for local sourcing of sustainable materials, would also help MSMEs transition towards environmentally responsible practices.  
  • This will enable MSMEs to not only align with global sustainability goals but also reduce their dependence on imports. 
• Sector-Specific Credit Programs: As per NITI Aayog’s recommendations, it is crucial to establish sector-specific credit programs tailored to meet the distinct needs of industries like textiles, defense manufacturing, and food processing.  
  • These programs should focus on addressing challenges such as working capital requirements, technology adoption, and market access, particularly for MSMEs in these high-growth sectors.  
  • Such specialized financing will help enhance their productivity and global competitiveness. 
• Improved Market Intelligence and Export Assistance: To boost MSME exports, India should implement market intelligence programs that provide real-time insights into global market trends, trade barriers, and consumer preferences.  
  • Establishing dedicated export support cells in MSME clusters, along with training MSMEs in export procedures, will ensure they are better equipped to engage in international trade.  
  • Public-private partnerships can help MSMEs navigate export compliance and regulations more effectively. 
• Fostering Innovation and R&D through Public-Private Collaboration: Creating innovation hubs in collaboration with academic institutions and research bodies can drive R&D for MSMEs.  
  • Subsidizing access to cutting-edge technologies and offering tax incentives for MSMEs investing in R&D will encourage innovation.  
  • Additionally, facilitating public-private partnerships (PPPs) in R&D will ensure that MSMEs can leverage state-of-the-art technology to improve production efficiency and product quality. 
• Improving Legal and Intellectual Property Support: Strengthening IPR (Intellectual Property Rights) support for MSMEs is critical to foster innovation.  
  • Government agencies should provide subsidized IPR registration and legal assistance to MSMEs for protecting their intellectual assets.  
  • Offering training on patent rights, trademarks, and copyrights will also empower MSMEs to protect their innovations and encourage more creative ventures in the sector.

Conclusion:

From the missing middle to India's economic juggernaut, India's MSME sector is poised to unlock unprecedented growth. By tackling challenges such as access to finance, skill gaps, and regulatory complexities, MSMEs can drive innovation and job creation at scale. Empowering these businesses with digital tools, tailored credit schemes, and improved infrastructure will enhance their global competitiveness. With a focus on inclusivity and sustainability, MSMEs can truly become the backbone of India’s future prosperity. 

Drishti Mains Question: Discuss the role of Micro, Small, and Medium Enterprises (MSMEs) in driving India’s economic growth and employment generation. What are the key challenges faced by MSMEs, and how can the government’s policies be enhanced to address these challenges and foster sustainable growth in the sector?