MSME- Global Power House and backbone to India's Economy

Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India's economy, contributing significantly to employment, exports, and GDP. However, despite their importance, the sector has long struggled with multiple challenges that have only been exacerbated by recent policy changes and global disruptions.

India's Micro, Small, and Medium Enterprises (MSMEs) are pivotal to the nation's economic framework, contributing approximately 30% to the Gross Domestic Product (GDP) and accounting for about 45% of the total industrial output. Despite their significant role, MSMEs have historically faced challenges such as limited access to formal credit, bureaucratic hurdles, and technological obsolescence. These issues have been compounded by policy shifts like the Goods and Services Tax (GST) implementation, demonetization, and the COVID-19 pandemic, which collectively strained the sector's resilience.

Historical Shortcomings

The MSME sector has historically suffered from structural and systemic weaknesses. A major issue has been inadequate access to formal credit. Most small businesses rely on informal lending sources, leading to high borrowing costs and vulnerability to financial shocks. Bureaucratic red tape and regulatory complexities have also hindered growth, as small businesses often struggle to comply with multiple regulations, obtain licenses, and secure approvals.

Lack of technological adoption is another persistent issue. Many MSMEs, especially in rural and semi-urban areas, operate with outdated machinery and inefficient processes, making them less competitive in both domestic and international markets. Additionally, limited market access and dependency on intermediaries prevent them from realizing their full profit potential.

Demonetisation and Its Aftermath

The 2016 demonetisation move, aimed at curbing black money, had a disproportionate impact on the MSME sector, which relies heavily on cash transactions. With sudden liquidity shortages, many small businesses, especially in unorganized sectors like textiles, handicrafts, and daily-wage-dependent industries, faced severe slowdowns. Daily operations were disrupted, leading to job losses and a decline in overall productivity.

The lack of adequate digital infrastructure among small businesses meant that many struggled to adapt to cashless transactions, further compounding their difficulties. Though the policy was intended to formalize the economy, it inadvertently pushed many MSMEs into financial distress.

Impact of GST on MSMEs

The introduction of the Goods and Services Tax (GST) in 2017 aimed to simplify India’s tax structure but posed significant challenges for MSMEs. While it eliminated cascading taxes, the compliance burden increased for small businesses unfamiliar with digital tax filing. Many MSMEs struggled with frequent changes in tax slabs, complex return filing procedures, and working capital crunch due to delayed input tax credit refunds.

The requirement for e-invoicing and digital record-keeping further strained businesses with limited technological infrastructure. Though the government later introduced simplified composition schemes for small taxpayers, the initial disruption led to revenue losses and business closures, especially for those operating in the informal sector.

COVID-19 Impact on MSMEs

The COVID-19 pandemic dealt a devastating blow to MSMEs, leading to business shutdowns, supply chain disruptions, and loss of livelihoods. Nationwide lockdowns brought operations to a standstill, and demand fell sharply across industries. Export-oriented MSMEs struggled as global trade was affected, while domestic businesses faced severe cash flow problems.

The workforce crisis was another major challenge, as reverse migration of laborers left many businesses unable to resume operations even after lockdown restrictions were lifted. Many MSMEs shut down permanently due to an inability to sustain fixed costs like rent, salaries, and loan repayments.

Government Mitigation Efforts

In response to these crises, the government announced several relief measures, including:

Emergency Credit Line Guarantee Scheme (ECLGS): Offered collateral-free loans to MSMEs to address liquidity issues.

Atmanirbhar Bharat Package: Provided financial support, reduced compliance burdens, and promoted local manufacturing.

Revised MSME Definition: Increased the turnover and investment limits to enable more businesses to qualify for benefits.

Subsidized Interest Rates: Extended interest subvention schemes to reduce borrowing costs for MSMEs.

Digital Initiatives: Promoted e-marketplaces and digital payment solutions to improve market access.

While these measures provided short-term relief, their effectiveness has been mixed. Many MSMEs found it difficult to avail of formal credit due to stringent eligibility criteria. Bureaucratic delays in loan disbursals and lack of awareness about government schemes further limited their reach.

Impact and Shortcomings of Government Efforts

Despite policy interventions, MSMEs continue to struggle. Loan schemes, while beneficial for larger MSMEs, failed to reach micro-enterprises due to procedural challenges. The push for digitalization overlooked businesses with limited internet access. The relaxation of labor laws in some states was met with resistance from workers, leading to labor shortages.

Additionally, the lack of structural reforms in land acquisition, power tariffs, and taxation continues to burden small businesses. While government stimulus packages provided immediate liquidity support, they did not address the deeper systemic issues affecting MSMEs' long-term growth.

Way Forward: Affirmative Actions Required

To ensure the sustainable revival of the MSME sector, the following steps are crucial:

1. Simplified and Flexible Taxation

Streamlining GST processes with a single-return system for small businesses.

Faster input tax credit refunds to ease working capital constraints.

2. Enhanced Access to Credit

Strengthening digital lending platforms with minimal documentation.

Expanding microfinance schemes for nano and micro enterprises.

Introducing risk-sharing mechanisms to encourage banks to lend to MSMEs.

3. Technology and Skill Development

Providing subsidized training programs to improve digital literacy.

Encouraging MSMEs to adopt automation and modern manufacturing techniques through government incentives.

4. Market Expansion and Export Support

Strengthening e-commerce linkages and international trade facilitation.

Reducing export documentation requirements for small businesses.

5. Infrastructure and Regulatory Ease

Developing MSME industrial clusters with shared resources.

Reducing compliance burdens and simplifying licensing processes.

6. Resilient Workforce Policies

Implementing social security schemes tailored for MSME workers.

Supporting formalization of employment with incentives for MSMEs.

In the Union Budget for 2025-26, the government has introduced several initiatives aimed at revitalizing the MSME sector:

1. Enhanced Credit Guarantee Scheme: A new credit guarantee scheme has been proposed to provide collateral-free term loans to MSMEs for the purchase of machinery and equipment. This scheme will offer guarantee coverage up to ?100 crore per applicant, facilitating easier access to necessary capital for technological upgrades and capacity expansion.

2. Mudra Loan Limit Increase: The limit for Mudra loans under the 'Tarun' category has been increased from ?10 lakh to ?20 lakh. This enhancement aims to support existing MSMEs in scaling their operations and investing in new technologies, thereby fostering innovation within the sector.

3. New Credit Assessment Model: Public sector banks will develop an in-house credit assessment model based on the digital footprints of MSMEs. This approach is designed to provide a more comprehensive evaluation of an MSME's creditworthiness, especially benefiting those without formal accounting systems.

4. Support During Financial Stress: A new mechanism will be established to facilitate the continuation of bank credit to MSMEs during periods of financial stress. This initiative aims to prevent MSMEs from slipping into non-performing asset (NPA) status by providing necessary credit support during challenging times.

5. E-commerce Export Hubs: To enable MSMEs and traditional artisans to access international markets, e-commerce export hubs will be set up in a public-private partnership (PPP) mode. These hubs will provide a seamless regulatory and logistic framework, facilitating trade and export-related services under one roof.

These initiatives reflect the government's commitment to addressing the longstanding challenges faced by MSMEs and to fostering an environment conducive to their growth and competitiveness. India’s MSME sector stands at a crossroads, requiring a well-coordinated policy approach that goes beyond short-term relief. While government initiatives have offered some respite, structural reforms are essential for long-term resilience. By improving credit access, simplifying regulations, fostering technological adoption, and ensuring inclusive growth, India can unlock the true potential of its MSME sector, making it a global powerhouse.

However, the effectiveness of these measures will depend on their implementation and the ability of MSMEs to leverage these opportunities. Continuous monitoring and adaptive policy frameworks will be essential to ensure that the intended benefits reach the grassroots level, thereby strengthening the backbone of India's economy.

Will the Modi government have it all to support MSME whole heartedly to help Indian Economy, only the government's action alone can vouche....