Unveiling the Power of MSMEs: Growth Engines of the Indian Economy.

Unveiling the Power of MSMEs: Growth Engines of the Indian Economy.


Did you know that Micro, Small, and Medium Enterprises (MSMEs) contribute to nearly 45% of India's manufacturing output and 40% of its exports? These staggering figures not only highlight the significance of MSMEs in the Indian economy but also point to the vast opportunities they offer. Whether you are a budding entrepreneur or an established business owner, understanding the landscape of MSMEs can provide you with insights into leveraging growth opportunities and navigating challenges with the support of government initiatives.

What are MSMEs?

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, which became effective on October 2, 2006, defines MSMEs. The MSMED Act of 2006 defines Micro, Small, and Medium Enterprises based on

  1. investment in plant and machinery for those involved in the manufacture, production, processing, or preservation of goods and services.
  2. The purchase of equipment for businesses that provide or offer services.

New Definition of MSMEs:

According to the new definition of MSMEs released in May 2020, the amount of investment limit has been raised and a new turnover condition has been added.

The distinction between the manufacturing and services sectors has been removed.

Under the new criteria, a micro-enterprise can invest up to Rs 1 crore and a turnover of less than Rs 5 crore, a small firm has an investment of up to Rs 10 crore and a turnover of up to Rs 50 crore, and a medium firm has an investment of up to Rs 20 crore and a turnover of less than Rs 100 crore.

Benefits provided to MSMEs:

  • Priority sector lending benefits for loans.
  • The Government and its agencies allocate 25% of procurement for MSMEs.
  • Under insolvency legislation, promoters (unlike large corporations) are permitted to bid on stressed assets.
  • Various government programs and funds are available.

List of businesses engaged in providing or offering services:

Examples of businesses falling under the services category include:

  • Small road and water transport operators with an initial vehicle investment of up to Rs. 200.00 lakhs under the Priority sector.
  • Retail commerce with credit limits up to Rs. 20.00 lakhs.
  • Small business (where the original cost price of the equipment utilized for commercial purposes does not exceed Rs.20.00 lakhs)
  • Professional and self-employed individuals (whose borrowing limits do not exceed Rs.10.00 lakhs, of which no more than Rs.2.00 lakhs should be for working capital requirements, except in the case of professionally qualified medical practitioners establishing a practice in semi-urban and rural areas, where borrowing limits do not exceed Rs.15.00 lakhs, with a sub-ceiling of Rs.3 lakhs for working capital requirements)

Significance of MSMED Act 2006:

The MSMED Act of 2006 led to the inclusion of the services sector in the definition of MSMEs and expanded the scope to cover Medium Enterprises.

Share of MSMEs in India:

As per the Planning Commission, Micro, Small, and Medium Enterprises have a pivotal role in terms of output, exports, and employment.(approximately 45% of manufacturing output), exports (about 40% of overall exports), and employment (about 69 million people in over 29 million units across the country). It is observed that as income increases, the share of the informal sector decreases while that of the formal SME sector increases.

  • SMEs in Japan employ 70% of wage earners and produce 55% of value-added.
  • Thailand - SMEs employ 60.7% of the workforce and contribute 38% of GDP.
  • China - SMEs account for more than 68% of total exports - has developed more SMEs in the last 20 years than Europe and the United States combined.

The Role and Significance of MSMEs in the Indian Economy:

To generate large-scale employment:

Capital is rare in India, but labor is plenty. MSMEs are regarded to have better capital-output and capital-labor ratios than large-scale industries, serving growth and employment objectives better. Since 1960, India's MSME sector has risen rapidly, with an average yearly increase of 4.4% in the number of units and 4.62% in employment (now employing 30 million). MSMEs not only generate the most employment per capita investment, but they also help to reduce rural-urban migration by providing individuals living in remote locations with a stable source of income.

Sustaining Economic Growth and Enhancing Exports

Non-traditional goods account for more than 95% of MSME exports (with sports goods, readymade clothing, plastic products, and so on dominating). Because these items are usually handcrafted and hence eco-friendly, there is enormous potential to increase the volume of MSME-led exports. MSMEs also serve as support sectors for large-scale industries, supplying raw materials, key components, and backward linkages, for example, big-scale cycle makers in Ludhiana rely significantly on MSMEs in Malerkotla that manufacture cycle parts.

Promoting Inclusive Growth

MSMEs are tools for inclusive growth that have an impact on the lives of the most vulnerable and marginalized people. It is the sole source of income for many families. Rather than focusing on charity, this sector aims to enable people to overcome the cycle of poverty and hardship. It emphasizes people's abilities and agency. However, different social groups dominate different segments of the MSME sector.

Policy Approach to Small-Scale Industries:

  • While MSMEs have been acknowledged as vital for employment generation and equitable income distribution post-India's independence, the objectives of policies underscoring their importance seem unfulfilled.
  • Since 1947, and particularly since the late 1950s, growth has been broad in scope, both regarding programs and regions. Fiscal concessions subsidized and directed bank loans, technical and marketing assistance, and product reservations for exclusive production by the MSME sector were among the policy measures implemented.
  • These regulations aligned with other strategies, like domestic investment and foreign trade policies, which progressively tightened.
  • Since the mid-1980s, there has been a steady shift in policy, including tax reform and liberalization of import policy.
  • In 1991, the adoption of a dedicated MSME policy signified a shift in focus from protectionism to fostering competitiveness. Since then, legislative support has been substantial in the 1990s and early 2000s to enable MSMEs to overcome critical hurdles to their performance and growth, such as finance, technology, and marketing, among others.
  • To run these initiatives and assess their progress, new agencies and institutions have been established, and old ones have been strengthened at the national, regional, state, and local levels. SIDBI is a special bank for MSMEs. The SSIs have their own organizations and are also represented in national and state-level organizations of large-scale industries.

Challenges Faced by MSMEs:

  • Most unregistered MSMEs are micro-enterprises, predominantly in rural areas, reliant on outdated technology and with restricted access to formal financing. And there is a need to convert the vast majority of unregistered MSMEs into registered MSMEs.
  • The overall competitiveness of the MSME sector must be improved.
  • Technology availability.
  • Concerns about intellectual property rights.
  • Design as a market catalyst.
  • Inefficient use of resources/labor.
  • Inefficiency and excessive costs are linked with energy.
  • Low use of ICT.
  • Market penetration is low.
  • Quality control/certification.
  • Product standardization and adequate marketing channels are required to enter new markets.
  • Since the last adjustment in 2006, the definition of MSMEs has needed to be modified to account for inflation and the availability of new technologies.

Government Initiatives: Empowering MSMEs

  • As part of the National Manufacturing Competitiveness Programme (NMCP), ten particular measures were implemented to improve the competitiveness of the MSME sector's whole value chain.
  • The Limited Liability Partnership (LLP) Act of 2008 was enacted to provide for early corporatization of MSMEs and access to the capital market for financing. As a result, MSME platforms were established on the BSE and NSE in 2012.
  • In 2009, India's Prime Minister instituted a task force to formulate a blueprint for the growth and enhancement of MSMEs. The Task Force, which included six theme-based sub-groups (credit, marketing, infrastructure, technology, skill development, exit policy, labor, and taxation), submitted its report in 2010 and recommended: (1) immediate policy measures (2) medium-term institutional measures (3) legal and regulatory structures to create a conducive environment for entrepreneurship and growth of MSMEs.
  • The Inter-Ministerial Committee focused on expediting manufacturing within the MSMEs and put forth recommendations on (a) promoting start-ups and (b) facilitating operation and growth (credit, technology, and marketing). (c) termination and exit; (d) labor rules and regulations.
  • These policy measures, coherent and definitive, aim to transform the MSME landscape by impacting: (1) Inception (Fostering New Ventures) and (2) Operations and growth (through regulatory simplification and enhanced credit accessibility). Better technology and more dynamic markets, in addition to competent labor and dependable infrastructure) (3) A smooth and orderly exit.
  • Consequently, the evolving emphasis of India's MSME policy seeks to cover the entire lifecycle of MSMEs, fostering a robust and dynamic sector.

A Call to Action for Aspiring Entrepreneurs

The Indian MSME sector presents a fertile ground for aspiring business owners. With government initiatives fostering a more supportive ecosystem, now is the perfect time to embark on your entrepreneurial journey. Are you ready to be a part of India's growth story?


MSMEs are the lifeblood of the Indian economy, generating employment, fostering innovation, and driving exports. By addressing existing challenges and leveraging government initiatives, MSMEs can unlock their full potential and propel India's economic growth to even greater heights.

Visit Acehours to learn more about MSME support programs, funding options, and resources to help you launch and grow your dream business!

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