What are MSMEs in India?

Did you know MSMEs in India contribute nearly 30% of the GDP and generate employment for over 110 million people? These businesses form the backbone of the Indian economy, driving growth across industries like manufacturing, retail, and IT.

The MSME full form is Micro, Small, and Medium Enterprises. These small, medium, and microenterprises comprise local manufacturers, IT service hubs, handicraft shops, small retail setups, and more. Creating such thriving enterprises across the country significantly affects India’s social, economic and industrial growth. The government of India actively supports these MSMEs via tax benefits, financial aid, and specialised MSME schemes. Initiatives like collateral-free loans, subsidies, and relaxed compliance norms help businesses scale and compete in national and international markets.

Therefore, despite their contributions, MSMEs face challenges like limited access to credit, high operational costs, and market competition. However, with the right policies and digital advancements, MSMEs can continue to grow and shape India’s economic future.

In this blog, we will explore the MSME meaning, classification, role of MSMEs in India, challenges, and government initiatives that help them thrive.

What is MSME – Classification and Types?

Understanding MSMEs: Definition and Categories in India

The MSME meaning depends on investment in plant and machinery and annual turnover. The Ministry of Micro, Small & Medium Enterprises revised the classification in 2020 to promote business growth and encourage competitiveness.

Micro Enterprises

A business where the investment in plant, machinery, or equipment does not exceed ₹1 crore, and the turnover does not exceed ₹5 crore. However, as of 1st April 2025, the investment limit of microenterprises is updated to ₹2.5 crore only with a turnover limit of ₹10 crore. These enterprises typically include local shops, artisans, and small-scale manufacturers.

Small Enterprises

A business where the investment in plant, machinery, or equipment does not exceed ₹10 crore, and the turnover does not exceed ₹50 crore. This category often includes small manufacturing units, wholesale traders, and service providers.

Medium Enterprises

A business where the investment in plant, machinery, or equipment does not exceed ₹50 crore, and the turnover does not exceed ₹250 crore. However, this classification was established in 2020, and as of 1st April 2025, the classification for medium enterprises has been revised to an investment limit of ₹125 crore with a turnover limit of ₹500 crores.

These businesses operate on a larger scale, contributing significantly to exports, industrial production, and employment.

How MSMEs Drive India’s Economic Growth

The role of MSMEs in India is significant, with a nearly 30% contribution to the country’s GDP. MSMEs in India help create employment, generate exports, and drive industrial innovations. Hence, these micro, small, and medium enterprises ensure that development is inclusive by supporting different types of entrepreneurs and boosting rural economies.

Here’s how MSMEs drive India’s economic growth:

1. GDP Contribution

MSMEs contribute significantly to India’s GDP. Therefore, their presence across different industrial domains, such as retail, IT, and manufacturing, helps fuel economic stability and growth. With their expansion, the MSME contribution to GDP continues to increase, bolstering their hold on India’s development.

2. Employment Generation

MSMEs employ over 110 million people, making them the second-largest employment generator after the agricultural sector. Ultimately, MSMEs help to bridge the gap between urban and rural employment by creating jobs in rural, small towns and villages, fostering skill development and promoting entrepreneurship.

3. Growth Of Exports

According to the Press Information Bureau, the MSME-related products contributed 45.73% to India’s total exports in 2023–24, showcasing their strong presence in global trade. With manufacturing units producing high-demand goods like auto parts, textiles, handicrafts, and pharmaceuticals, the MSME sector continues to play a vital role in enhancing India’s export performance and global competitiveness.

4. Inclusive Rural Development

The nature of MSMEs in India is that they promote economic inclusivity, i.e., support grassroots artisans, rural, small-scale manufacturers and even startups. Unlike tier-1 cities peppered with big multinationals, MSMEs operating in tier-2 and tier-3 cities help boost industry growth in regions outside of metropolitan cities.

5. Credit Access and Financial Support

Access to financial support, such as loans and credit periods, is a challenge for MSMEs. Therefore, to help them grow, banking and financial institutions offer them collateral-free small business loans with lower interest rates on MSME/SME loans. These options allow MSMEs to scale their business operations, buy necessary equipment, and even amplify their reach.

Features of MSMEs

1. Minimal Capital Required

One of the characteristics of MSMEs is that theydo not need big investments. They can start with minimal capital investment in the initial stages, making them accessible to small-time business owners and first-time entrepreneurs.

2. High Employment Generation

Intensive labour is at the heart of MSME operations. Therefore, they depend on manual labour instead of high-tech machinery. Due to the high demand for labour, MSMEs are able to create jobs for both unskilled and skilled workers.

3. High Adaptability and Flexibility

What makes MSMEs unique is their quick adaptability to consumer demands, trends, and new technology. Therefore, as they can adapt to any market, they survive economic downturns.

4. Fostering Entrepreneurial Mindset and Innovation

Innovation is at the core of MSMEs. They introduce new services and products across industries. In fact, many startups in India first began as MSMEs. Over the years, they have established themselves as successful businesses by evolving with market needs and technology adoption.

5. Amplifying Reach Beyond Local Markets

With the government’s support, MSMEs in India can expand their reach beyond the local markets and cater to their internal customer base. This will help boost exports of goods and services, contributing significantly to India’s economy.

6. Schemes and Incentives by Government

The government has introduced many MSME schemes in India to help boost this sector’s growth. MSMEs get tax exemptions, financial aid and even reduced compliance requirements. This helps to encourage more MSME businesses to enter the market, expand operations, and contribute to the economy.

Read More: MSME Registration: Process, Fee, & Documents Required in India

Different Types of MSMEs in India

1. Manufacturing MSMEs

MSMEs in manufacturing are enterprises that focus on producing raw materials, machinery, and labour. In short, they produce tangible goods. Also, they play a significant role in the development of the industrial and export sectors.  

Example of Manufacturing MSMEs:

• Textile manufacturers: These can be small-scale in nature, producing garments, fabrics and even handmade, hand-embroidered clothes.
• Food processing plants: MSMEs that run packaged food businesses, such as snacks, condiments, dairy products, and even organic foods.
• Auto component manufacturing: Small firms producing spare parts for the automobile industry.
• Handicrafts and cottage industries: Traditional businesses making jewellery, wooden crafts, and handmade décor.

2. Service MSMEs

Unlike manufacturing businesses, service MSMEs provide professional, technical, and other business services. They contribute to the IT, financial, and retail industries.

Examples of Service MSMEs:

• IT & software firms: Small companies offering website development, app development, and cybersecurity solutions.
• Repair and maintenance services: Local businesses providing automobile repairs, home maintenance, and electronic repairs.
• Travel and tourism agencies: Small businesses arranging domestic and international travel plans.
• Financial services: Independent firms offering bookkeeping, accounting, and tax filing services.

Therefore, understanding the types of MSMEs helps us appreciate their diverse contributions. Manufacturing MSMEs and service MSMEs play a key role in industrial and service sector growth.

Benefits of MSMEs for Businesses

Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in boosting economic growth by offering numerous advantages to businesses. Therefore, registering as an MSME unlocks financial support, subsidies, and priority lending, making it easier for businesses to grow and sustain themselves in competitive markets. Here are some key benefits of MSMEs in India:

1. Access to Government Schemes and Subsidies

The government offers collateral-free loans through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which means businesses can get loans without needing to pledge assets. There are also benefits like subsidised electricity and tax rebates that help lower daily running costs. Additionally, businesses can get money back for ISO certification expenses, which helps them improve product quality and build a stronger reputation globally.

2. Easier Access to Finance

One of the biggest hurdles for small businesses is securing funding. Hence, MSME registration ensures priority lending, lower interest rates, and relaxed collateral requirements. Financial institutions and fintech platforms actively support MSMEs through customised credit solutions.

3. Opportunities for Innovation and Growth

MSMEs contribute significantly to industrial innovation, research, and development. Startups and small businesses in the technology, manufacturing, and service sectors benefit from government-led incubators and funding programmes that support innovation.

4. Contribution to Self-Reliance (Atmanirbhar Bharat Initiative)

Under the Atmanirbhar Bharat Abhiyan, MSMEs receive financial aid, digital transformation support, and incentives to promote domestic manufacturing. Thus, these measures help businesses compete globally while strengthening India’s self-reliant economy.

5. Market Expansion and Export Promotion

The Indian government promotes MSME exports through initiatives like the Export Promotion Council for MSMEs (EPCMSME). Businesses receive support in terms of global market access, financial assistance, and more straightforward compliance regulations for international trade.

6. Protection Against Late Payments

Under the MSME Development Act, registered MSMEs can legally demand timely payments from buyers. This law ensures a smoother cash flow, reducing financial stress for small businesses.

7. Skill Development and Employment Generation

MSMEs create millions of jobs across sectors, boosting economic growth and providing workers with skill-development opportunities. They also empower rural and urban entrepreneurs and reduce unemployment and poverty.

Therefore, registering as an MSME is a strategic move for businesses seeking benefits. There are several benefits of MSMEs in India, including the ability to grow sustainably and contribute to India’s economic success.

Read More: 10 Smart Ways to Use MSME/SME Loans to Expand Your Business

Government Initiatives to Support MSMEs

The Indian government has introduced multiple government schemes for MSMEs to provide financial aid, skill development, and market access. Therefore, these MSME support programmes help small businesses overcome challenges and thrive in a competitive market.

1. Prime Minister’s Employment Generation Programme (PMEGP)

This scheme encourages self-employment by offering subsidies for new businesses. Under PMEGP:

• The government provides a subsidy of 15-35% on project costs.
• It supports manufacturing and service-based MSMEs.
• Banks and financial institutions offer financial assistance.

2. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

Lack of collateral is a significant obstacle for small businesses. CGTMSE provides collateral-free loans to MSMEs, with a maximum loan limit of ₹5 crore per borrower, as of April 2023. The scheme aims to reduce the financial burden on small enterprises and promote entrepreneurship. It provides:

• Collateral-free loans up to ₹5 crore for micro and small enterprises.
• Higher coverage for smaller loan amounts, ensuring better credit access.
• Reduced risk for lenders, making business loans more accessible.

3. Atmanirbhar Bharat Abhiyan

Under this initiative, the government introduced a ₹3 lakh crore emergency credit line to help MSMEs recover from economic downturns. Other benefits include:

• Relaxed loan repayment terms and lower interest rates.
• E-market linkage for MSMEs, allowing digital transformation.
• Promotion of local manufacturing and reduction of dependency on imports.

4. TReDS Platform for Financing

The Trade Receivables Discounting System (TReDS) is a digital platform that helps MSMEs get quick payments from corporate buyers. Benefits include:

• Faster invoice clearance improves cash flow.
• Competitive financing rates reduce dependence on high-interest loans.

5. MSME SAMADHAAN and SAMBANDH

SAMADHAAN helps MSMEs file complaints against delayed payments. It also promotes MSME participation in public sector procurement, ensuring business opportunities with government organisations.

6. Startup India and Stand-Up India

These initiatives support MSMEs in the startup ecosystem by providing funding, mentorship, and tax exemptions. They encourage women and SC/ST entrepreneurs to establish their businesses.

These government schemes for MSMEs and MSME support programmes are essential for fostering growth, innovation, and financial stability for small businesses in India.

Challenges Faced by MSMEs in India

Despite their economic contribution, MSMEs face several hurdles that impact their growth and sustainability. Challenges of MSMEs in India include:

1. Access to Finance and Credit

• Most MSMEs struggle to secure funding due to strict bank requirements and a lack of collateral.
• Schemes like CGTMSE provide collateral-free loans, many small businesses struggle to navigate the approval process.

2. Technology Adoption and Digitalisation

• Many MSMEs operate with outdated machinery and lack access to modern digital tools.
• Unfortunately, limited awareness and high costs prevent businesses from adopting advanced technology, affecting productivity and competitiveness.

3. Market Competition and Global Trade Barriers

• MSMEs compete with large corporations and foreign players, often struggling due to limited branding and marketing resources.
• High import duties, regulatory restrictions, and lack of export knowledge create barriers for MSMEs looking to expand globally.

4. Compliance and Regulatory Issues

• Tax compliance and licensing are complex and time-consuming.
• MSMEs often face difficulties in adhering to labour laws, environmental regulations, and GST norms.

5. Lack of Skilled Workforce

• Small businesses struggle to find trained professionals due to budget constraints.
• Limited training programmes result in low productivity and inefficiency in MSME operations.

Therefore, addressing these MSME problems requires better financial support, digital literacy programs, and policy reforms to improve business efficiency.

Read More: Top 10 Financial Mistakes MSMEs Should Avoid and How to Overcome Them

The Future of MSMEs in India

MSMEs will play a key role in India’s vision of becoming a $5 trillion economy. With rapid technological advancements and financial reforms, the future of MSMEs looks promising. Let’s take a look at the MSME trends in India:

1. Digital Transformation and Fintech Growth

• Government initiatives like Digital India and fintech solutions enable MSMEs to adopt online banking, e-commerce, and digital payments.
• AI-driven business solutions improve supply chain management and customer engagement.

2. Increased Access to Global Markets

• Free trade agreements and government export incentives allow MSMEs to compete internationally.
• Online platforms help MSMEs reach global customers, expanding their market base.

3. Sustainability and Green Business Initiatives

• MSMEs are adopting eco-friendly manufacturing processes to meet global sustainability standards.
• Government policies encourage energy-efficient businesses with tax benefits and incentives.

4. Skill Development and Workforce Training

Programs like Skill India train workers, ensuring MSMEs have access to a skilled and competitive workforce.

5. MSME Trends in India: Rise of Startups

• The Indian startup ecosystem is booming, with MSMEs playing a central role in technology innovation, AI, and automation.
• Government-backed incubators and venture capital investments are creating new opportunities for small businesses to scale quickly.

Opportunities in MSME

The MSME sector is a powerful growth engine, offering opportunities for entrepreneurs, startups, and growing businesses. Backed by initiatives like Atmanirbhar Bharat, Make in India, and Startup India, MSMEs now enjoy easier access to funding, digital tools, and global markets. Sectors like e-commerce, green energy, and manufacturing are ripe for innovation and rapid scale.

Whether you are starting out or planning to expand, now is the right time to tap into the potential of the MSME ecosystem.

Want to grow your business? Learn more about MSMEs and explore tailored business loan options to take your venture to the next level.

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