No matter how many laws and compliances you make online, there is always the inspector who will come knocking,” says a ruefully smiling Ramesh Yadav (name changed on request), who heads a local SME industry association, when asked to name the challenges for small entrepreneurs. “Add to these the problems of delay in payments,” Yadav points out. “An entrepreneur has to have guts or big dreams to start a business. Otherwise, why will they put their money and deal with all these challenges? Would it not be better to just invest the capital in mutual funds and enjoy an easy life?” he asks. Yadav lists the struggles of micro, small, and medium enterprises (MSMEs), which contribute nearly a third of India’s gross domestic product (GDP) and are the largest non-farm employer. Yet, several of them remain mired in problems too granular for policymakers in New Delhi to identify and resolve. “The sector plays a critical role in job creation, industrial output, and entrepreneurship. However, MSMEs face structural challenges that limit their ability to scale,” says Arun Singh, Global Chief Economist, Dun & Bradstreet. Boosting these businesses— makers of everything from bangles to automobile components—could unlock a new cycle of economic growth for India. OVERCOMING DEMONETISATION Data suggests that five years after the Covid-19 pandemic, MSMEs have largely recovered, with improved strength and productivity. By 2023-24, 73.4 million MSMEs were registered under the Udyam and Udyam Assist platforms, marking a 12.84% increase from the previous year. Employment has also risen. The Annual Survey of Unincorporated Sector Enterprises conducted by the Ministry of Statistics and Programme Implementation found that in 2023-24, there were 73.4 million informal sector establishments employing 120 million workers. Government initiatives such as the Udyam registration portal and the Emergency Credit Line Guarantee Scheme (ECLGS) have boosted formalisation, while e-commerce and fintech solutions have lowered barriers for small businesses. “It is quite clear that the impact of the pandemic on the sector is largely over. However, there remain several challenges for these enterprises,” says Anil Bhardwaj, Secretary General of Federation of Indian Micro and Small and Medium Enterprises (FISME). Factors like inflation have impacted wage growth, and issues related to access to finance, technological adoption, and regulatory compliance continue to hinder MSMEs from realising their full potential. Structural roadblocks Despite signs of recovery, MSMEs continue to grapple with structural hurdles that limit their growth. K.E. Raghunathan, National Chairman, Association of Indian Entrepreneurs, believes the sector is still reeling from multiple shocks—demonetisation, the global slowdown, and the Covid-19 pandemic. While the rollout of the Goods and Services Tax (GST) was not as disruptive as initially feared, frequent rate changes and variations in tax slabs for similar products have added to compliance challenges for small businesses, he says. It is quite clear that the impact of the pandemic on the sector is largely over. However, several challenges remain for these enterprises -Anil Bhardwaj,SECRETARY GENERAL, FISME “Not every small business has to be registered for GST. But those that do not register are less competitive as they are not a part of the input tax credit chain and face problems in selling both to the domestic market and in exports. But being registered under GST means that compliance is a challenge, and many are just not equipped to deal with it,” says Bhardwaj. Raghunathan also points out that a persistent challenge for MSMEs is the “four Ms”—material, money, manpower, and marketing. High raw material costs, delayed payments, difficulties accessing bank loans, and a shortage of skilled labour continue to impede growth. Additionally, global uncertainties, including trade wars, threaten MSMEs’ operations. The sector contributes around 46% of India’s total exports, meaning changes in international trade policies directly affect their businesses. Delayed payments are another critical issue, despite there being a facilitation council to review payments delayed beyond 45 days as well as a new income tax rule, this continues to be too much of a burden. As many as 91,683 cases were filed with the MSE Facilitation Council over delayed payments involving Rs 28,215 crore by mid-February 2025, as per the MSME Samadhan portal. Over 41,000 cases are pending, reflecting slow enforcement. To support MSMEs in navigating legal and regulatory challenges, FISME is working on launching a Center for Improving Access to Justice to provide legal aid. But this is not all. There are several other obstacles for the sector as well. A recent report by L&T SuFin and Dun & Bradstreet had listed them out as access to finance and market, technological limitations, compliance and regulatory challenges, skilled workforce shortage, unfavourable external conditions and a lack of awareness. “India requires $11.6 trillion investments to scale up 13.4 million MSMEs,” the report titled Micro to Mighty—Outlining Strategic Priorities for MSMEs to Scale Up, had noted. Policy support The Indian government has supported MSMEs through various schemes. As of March 31, 2024, outstanding credit to MSMEs from banks and non-banking financial companies (NBFCs) reached Rs 31.7 lakh crore, up from Rs 18.48 lakh crore in 2020, according to government data. In the Union Budget 2025-26, Finance Minister Nirmala Sitharaman introduced key measures aimed at enhancing credit access, business ease, and capacity building. To help businesses expand and improve efficiency, the investment and turnover limits for MSME classification have been raised. The credit guarantee cover for micro and small enterprises has been doubled to Rs 10 crore, unlocking an additional Rs 1.5 lakh crore in credit over five years. The sector plays a critical role in job creation, industrial output, and entrepreneurship. However, MSMEs face structural challenges -Arun Singh,GLOBAL CHIEF ECONOMIST, DUN & BRADSTREET Raghunathan presents a contrarian view and says the government has been “unintentionally clueless” about the true needs of micro enterprises. “When entrepreneurs required oxygen, vitamin was given instead. Initiatives for technology upgradation, skilling of entrepreneurs and credit guarantee should have happened at least four to five years ago to enable MSMEs to be more competitive now,” he says. Road ahead Singh says that while the Union Budget provides significant support for MSMEs, addressing credit bottlenecks, improving payment discipline, enabling technology adoption, and expanding global market access will be crucial for MSMEs to achieve sustainable growth. “However, policy effectiveness will hinge on execution and enforcement,” he says. Some areas also require more attention, which include improving credit access and risk management, enforcing timely payments, driving technology and digital adoption, simplifying regulatory compliance, strengthening export competitiveness, infrastructure and market connectivity and workforce development and skilling initiatives, he notes. State-level execution of policies is also a crucial factor. States too need to pick up the baton. Several legislations, including those relating to labour and factories are in the concurrent list, and states remain the implementing agencies for several regulations and laws. As India looks to revert to a high growth trajectory, unlocking the true potential of MSMEs could drive a new phase of economic growth, benefiting not only the businesses themselves but also the broader economy. @surabhi_prasad
