MSMEs: Backbone or Bottleneck?

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MSMEs: Backbone or Bottleneck?

MSMEs: Backbone or Bottleneck?

Articles
Jul 03,25

Finance remains the most pressing of these challenges. As noted by the Lok Sabha Standing Committee on Finance, India’s MSMEs face a staggering credit gap of Rs 20–25 trillion.

Every year on June 27, the world observes MSME Day, a global recognition established by the United Nations in 2017 to celebrate and spotlight the critical role of Micro, Small, and Medium Enterprises in shaping resilient and inclusive economies. For India, this day is under the shadow of a cloud of gloom but carries profound relevance. With over 74 million MSMEs, contributing nearly 30 per cent to the country’s GDP, generating 45.7 per cent of total exports, and employing more than 200 million people, the MSME sector is not just vital—it is foundational to India’s economic and social fabric. Despite their contribution, Indian MSMEs continue to face multi-dimensional challenges such as limited access to finance, technology adoption, increase compliance burden, etc.

Finance remains the most pressing of these challenges. As noted by the Lok Sabha Standing Committee on Finance, India’s MSMEs face a staggering credit gap of Rs 20–25 trillion. This shortfall is more than a funding issue—it reflects deep-rooted structural flaws in how banks assess creditworthiness, structure lending instruments, and align with MSMEs' real cash flow cycles. Many MSMEs, particularly micro-enterprises, are excluded from formal credit due to lack of collateral and patchy financial records.

India’s MSME manufacturing capabilities also remain shallow in several high-potential sectors. Over 90 per cent of solar module production in India, for example, still depends on imported cells, with just 15 per cent domestic value addition (This has been highlighted in this SME Edition's Cover Story). This overdependence on global supply chains—especially from China—makes Indian MSMEs vulnerable to global disruptions and exchange rate volatility.

Perhaps the most stifling challenge is the regulatory burden. A recent report by TeamLease RegTech exposes the overwhelming compliance load on manufacturing MSMEs in India—over 1,000 compliance requirements, Rs 1.3 million annual compliance cost, and more than 216 clauses involving imprisonment, often for technical errors. MSMEs must secure up to 77 different licences to commence operations, and face visits from as many as 59 inspectors—21 of them labour-related.

This phenomenon, dubbed “regulatory cholesterol”, not only discourages formalisation but also limits growth and investment. With an average of 42 regulatory changes occurring daily, compliance becomes a moving target, especially for small businesses without dedicated legal or finance teams.

Amid these challenges, however, a significant opportunity has emerged. Trade wars, especially between the US and China, have led to supply chain diversification and rising global demand for cost-effective, reliable manufacturing partners. Indian MSMEs now find themselves strategically positioned as viable alternatives. In sectors like electronics, apparel, chemicals, and pharmaceuticals, MSMEs are gaining global traction.

While the government has increased MSME allocations (Rs 231.68 billion in FY2026), these will remain inadequate unless accompanied by deeper structural reforms. Simplifying compliance, digitising approvals, improving logistics, and expanding formal credit access must become national priorities.

MSME Day is meant to celebrate their achievements—but more importantly, to confront the obstacles they face. These enterprises are not just the backbone of India’s economy; they are its lifeblood, its job creators, its innovation hubs. As India marches toward its vision of becoming a $5 trillion economy, empowering MSMEs is not a choice—it is an imperative.