Strengthening MSMEs for Economic Resilience | 27 Nov 2025

Source: IE 

Why in News? 

The Delayed Payments Report 3.0, “MSME’s Access to Finance and Timely Payments” highlights that many MSMEs face challenging conditions that limit their growth and contribution to the Indian economy, underscoring the need to strengthen innovation, and competitiveness in the sector.  

What are Micro, Small, and Medium Enterprises (MSMEs)? 

• About: Micro, Small, and Medium Enterprises (MSMEs) are businesses classified according to their investment in plant & machinery or equipment and annual turnover.  
  • They are vital to India's economy, fostering entrepreneurship, creating employment, and driving industrialization in rural and semi-urban areas. 
• Classification of MSMEs: 

• MSME Regulation in India:  The Micro, Small, and Medium Enterprises Development Act, 2006 addresses MSME issues, establishes a National Board, defines enterprise, and empowers the Central Government to boost MSME competitiveness. 
  • In 2007, the Ministry of Micro, Small, and Medium Enterprises was formed which develops policies, facilitates programs, and monitors implementation to support MSMEs. 

What Role do MSMEs Play in Driving the Growth of the Indian Economy? 

• Engine of Economic Growth & Employment: MSMEs contribute around 29% to India’s Gross Domestic Product (GDP) and around 36% to manufacturing output. 
  • It employs over 120 million people. For example, the textile industry employs millions in spinning, weaving, and apparel manufacturing. 
• Driving Exports & Global Trade: MSMEs account for nearly 45% of India’s total exports, boosting India’s position in global trade. The handicraft sector, dominated by small enterprises, contributes about 40% of global handmade carpet exports. 
• Rural Development & Inclusivity: MSMEs drive rural industrialization and inclusive growth, aligning with Dr. APJ Abdul Kalam’s PURA (Providing Urban Amenities in Rural Areas) vision. Institutions like Khadi and Village Industries Commission (KVIC), mainly small-scale units, aid in balanced regional development. 
• Catalyzing Innovation: India’s startup ecosystem—the third-largest globally—is predominantly MSME-driven, with innovations in e-commerce, fintech, and other emerging industries. 
• Women Empowerment: According to the Udyam Registration Portal, over 20% of MSMEs are women-owned, reflecting growing female participation in entrepreneurship. 

What are the Key Challenges Hindering MSME Growth in India? 

Financial Hindrance (as per the Report) 

• Delayed Payments: The value of delayed payments remains cripplingly high at Rs. 8.14 lakh crore. This ties up essential working capital, preventing businesses from investing in raw materials, new machinery, or even paying their employees on time. 
• Unmet Credit Needs: The report estimates the unmet credit need is around Rs. 25 lakh crore.  
  • While bank loans have grown to Rs. 12.99 lakh crore, this still leaves a huge gap, forcing MSMEs to rely on expensive informal credit or forgo growth opportunities. 
• Rigid Banking Practices: Credit policies like Priority Sector Lending and Mudra loans have widened coverage but fall short due to: 
  • Information asymmetry (banks lack the data to accurately assess the creditworthiness of small businesses). 
  • Punitive Non-performing Assets (NPA) classification norms, which make banks hesitant to lend to what they perceive as risky MSMEs, fearing the loans will be classified as stressed assets. 

Other Hindrances 

• Formalization Barrier: Fear of tax and regulatory scrutiny keeps small owners informal, limiting access to formal credit and government schemes; over 90% of MSMEs in India remain informal, according to NITI Aayog. 
• Inadequate Access to Specialized Knowledge: MSMEs often lack affordable advisory services for exports, Intellectual Property Rights (IPR) filing, and quality certifications (ISO), keeping them out of high-value markets. They also miss mentorship networks to guide scaling and crisis management. 
• Vulnerability to Global Supply Chain Shocks: Many MSMEs rely on imported raw materials, making them vulnerable to pandemics, geopolitical conflicts, or shipping crises, which disrupt supply chains and raise input costs.  
  • E.g., India's exports contracted by 9.3% in August 2024 due to Red Sea disruptions. 
• Limited Market Access: MSMEs face limited marketing and digital reach, reduced competitiveness from high tariffs (e.g., US 50% tariffs), and higher per-unit costs due to small size, constraining exports and profitability. 
  • A constant struggle for survival due to the working capital crisis leaves little capital for investment in research and development (R&D), new technologies, or upgrading machinery.

What Key Strategies can Help Transform India’s MSME sector? 

• Promote Alternative Financing: Promote Invoice Discounting, Peer-to-Peer (P2P) lending, and venture debt for high-growth MSMEs. Create a public credit registry using GST, utility bills, and Udyam data to enable cash-flow-based lending over collateral-based lending. 
• Market Access: Collaborate with e-commerce platforms to create low-fee, MSME-only storefronts with support for onboarding, cataloging, and digital marketing.  
  • Support export consortia through grants and logistics, helping MSME clusters meet large orders and international standards. 
• Technology Adoption: Provide financial grants for MSMEs to adopt cloud computing, and automated machinery to boost productivity, and set up sector-specific tech clinics offering affordable consultancy for technical upgrades. 
• Strengthen the MSME Samadhaan Portal: Enforce automated penalties on large corporations that delay MSME payments beyond 45 days, and implement a One-Time Settlement Scheme to clear statutory dues for micro-enterprises, reducing legal burdens. 
• Fostering Resilience: Promote cluster-based development with common facility centers (for testing, design, R&D) and shared infrastructure (effluent treatment, warehousing) to reduce costs, and incentivize green practices through tax benefits, faster loans, and ESG certifications.

Conclusion 

The MSME sector is crucial for India’s economic growth, employment, and exports, but its potential is limited by a credit gap, delayed payments, and technological obsolescence. A transformative strategy emphasizing formalization, digital financing, market access, and resilient infrastructure is essential to unlock its full impact.