Navigating challenges of MSMEs in India

Navigating challenges of MSMEs in India

The small businesses in any country are the mid-level propeller of the economy. Even in India MSMEs make great contribution to India’s economy. Contributing to GDP and generating mass employment, these industries have unique challenges too.

GoI is providing support to MSMEs’ through supportive legislative provisions, for Eg. Under the Section 16 of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, provisions for payments to be made in 45 days has been provided, irrespective of the any agreement between the parties. A failure to do so, causes compound interest to be paid at three times of the bank rate notified by the RBI.

MSMEs aresegregated as Micro, Small and Medium based on investments and turnover. Its definition was expanded in 2020 to encourage investment without losing the benefits of MSME.

MSMEs in India contribute over 8% to the nation’s GDP and over 45% to the total manufacturing output. Its increasing number also constitute over 40% of India’s total exports.

MSMEs offer employment to one-third of the 1.2 billion people working in the informal sector. It plugs into the needs of other businesses and small and large industries like, tourism, retail, transportation, construction, etc. The two major categories of MSMEs in India are:

  • Service enterprises
  • Manufacturing enterprises

The sector also works closely with GoI to develop the rural and backward areas.


1. Financial issues:

Access to stable and secure finances is still an issue for smaller businesses, MSMEs being no exception. Only 16% of SMEs actually get access to timely finance, which results in small and medium firms being forced to rely on their own resources or informal lending which increases business risk for them. Even the larger firms face difficulties in accessing cheaper credit from formal banks.

2. Skills:

Indian MSMEs are far behind their counterparts in other countries in skills deployed in the business and heavily rely on help of underpaid informal workers. There is a vacuum in technical skills which can help enhance productivity. Coupled with compliance requirements, MSMEs seen burdened in running their businesses legally and easily.

3. Regulatory issues:

Several regulatory issues have been identified over time, including tax compliance and changes to labor laws which have ended up costing the MSME sector. To make this sector more competitive certain labor reforms were attempted but they failed to make any major improvement despite making them more competitive than larger firms. It became difficult for MSMEs to comply with these regulations and register for tax compliance, causing them on low capital.

4. Low productivity:

MSMEs perform certain tasks that emit more value than they produce and may be productive only when it comes to being cost-efficient. However, given that their production is on a small scale with low margins, low productivity can put them at a disadvantage, in comparison to larger firms.

5. Lack of standardized policies:

There are very few MSME policies in India, thus reducing consistency in entrepreneurial promotion programs. To synergize and grow with global counterparts, more support is required on a national level. The provision on round tripping in the new overseas investment rules introduced by the government has created a buzz recently. With the consultation of RBI, the GOI undertook this comprehensive step with the aim to simplify the overseas investment rules. To know more about the changes made, click here.

6. Lack of innovation:

Innovation requires financial backing, where Indian MSMEs are typically lagging behind. Investment in research and augmentation of the technology related methods is not priority for MSMEs and the production continues to rely on outdated technologies. GoI’s NITI AYOG is a progressive initiative in this direction and more such programs could render better involvement for MSMEs.

7. Lack of professionalism:

Majority of Indian MSMEs lack professionalism despite being vital for larger industries’ growth. This is making them highly prone to corruption and power abuse, it is prone to operate like the disorganized sector.

8. Competition-Related Challenges

MSME are facing huge competition right now. Business has to fulfil the needs and exceed the expectations of its consumers to thrive in the competition. Marketing and Advertising abilities are significantly challenged in the space, resulting in limited outreach with lower market penetration.


GoI is required to play its part in the growth and development of MSMEs going forward as it plays a crucial role in creating domestic manufacturing capabilities by the leverage of proposed public procurements. In order to conquer these challenges, investment in better technology in the future is one of the viable solutions.

Here are some schemes which GoI has formulated to promote and support MSMEs:

Prime Minister Employment Generation Programme (PMEGP)Individuals above the age of 18 can apply for this scheme. Other beneficiaries can be Institutions registered under Societies, Self Help Groups, Charitable Trusts and Production Co-operative Societies.Provide financial assistance to self-employment ventures, to generate employment opportunities for unemployed youth and traditional artisans.
Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE)Current Entrepreneurs and Aspirant Entrepreneurs.To motivate first generation entrepreneurs towards self-employment by providing credit guarantee funding for third-party guarantee-free / collateral free loans.
Micro & Small Enterprises Cluster Development Programme (MSE– CDP) –Existing Entrepreneurs (in form of a SPV)Growth of MSEs by addressing advancements in sustainable & green manufacturing technology, market access, skills & quality, etc. Creating infrastructural facilities in existing Clusters of MSEs and Industrial Areas.
Lean Manufacturing Competitiveness for MSMEs –Existing EntrepreneursTo enhance manufacturing competitiveness of MSMEs by introducing Lean Manufacturing (LM) techniques – Increasing productivity; Inculcating good management systems; reducing waste and Imbibing a culture of continuous improvement.
Design Clinic for Design Expertise to MSMEs –Existing EntrepreneursTo facilitate the MSMEs in India with cost-effective solutions and expert advice on real-time design issues, further enhancing competitiveness by product developments in global markets.

This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.

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