Redefining MSMEs: What the new classification means for growth
Trade Promotion Council of India
Apex trade and investment promotion organization notified by the Department of Commerce, Government of India
The Union Budget 2025-26 has redefined MSMEs, increasing investment and turnover limits by 2.5x and 2x, respectively. Finance Minister Nirmala Sitharaman emphasized that the decision aims to help these businesses scale without losing benefits, a long-standing concern for the sector.
While the 2020 revision was a game-changer, challenges of credit access, slow implementation, and awareness gaps persisted. Can the latest redefinition resolve these issues?
In the Union Budget 2025-26, the Government of India has revised the definition of Micro, Small, and Medium Enterprises (MSMEs) by increasing investment and turnover limits—this time by 2.5 times and 2 times, respectively. Finance Minister Nirmala Sitharaman announced that the change is aimed at helping MSMEs scale up without the fear of losing benefits, a long-standing concern of businesses in this category.
The revised definition also removes the distinction between manufacturing and service-based MSMEs, bringing them under a single classification. Moreover, turnover has been introduced as a key parameter for defining MSMEs, which were previously categorized solely based on their scale of investment.
The MSME sector, with 5.93 crore enterprises employing over 25 crore people, is a key driver of India’s economy, contributing 45.7% to exports in 2023-24. The new budget aims to boost innovation, competitiveness, and resource access, strengthening MSMEs' role in economic growth and global manufacturing.
The last major revision of the category took place in June 2020, when investment limits were raised, and turnover was introduced as a new criterion.
However, industrialists believe that the revised MSME definition could hurt struggling micro units. With 67% of MSMEs having a turnover below ?10 lakh and 99% below ?1 crore, they argue that raising the investment cap to ?125 crore and turnover to ?500 crore is unrealistic. Many fear that the top 1% of MSMEs will absorb 95% of the benefits, leaving smaller enterprises at a disadvantage.
Current landscape of MSMEs in India
The MSME sector remains a key driver of India’s economy, with its GVA share rising from 27.3% in 2020-21 to 30.1% in 2022-23. Exports have surged from ?3.95 lakh crore in 2020-21 to ?12.39 lakh crore in 2024-25, while exporting MSMEs grew from 52,849 to 1,73,350. Their share in total exports reached 45.79% in 2024-25, reinforcing their role in global trade and India’s manufacturing growth.
Dr. Ketan Vira, Director, Pillai HOC Institute of Management Studies and Research, Rasayani, Raigad believes that raising investment limits for MSMEs at this juncture is a timely and strategic move. A look at the growth trajectories of developing nations confirms that MSMEs have played a defining role in their progress. He opines:
"At any stage of economic development, especially during the takeoff phase, a crucial initiative is boosting MSMEs. By textbook definition, MSMEs are the building blocks of growth, driving a three-dimensional impact. First, they fuel economic expansion. Second, real value creation happens through MSMEs, as large businesses are often policy-driven, whereas MSMEs contribute significantly to innovation and productivity. Third, a ‘Viksit Bharat’ must include micro-enterprises to ensure truly inclusive growth."
Previous Definition of MSMEs and its implications
The government previously attempted to update the definition on multiple occasions. The MSME Development (Amendment) Bill, 2015 proposed increasing investment limits but was eventually withdrawn. In 2018, another amendment bill was introduced, proposing a shift from investment-based classification to turnover-based criteria while eliminating the distinction between manufacturing and service MSMEs. However, this bill lapsed with the dissolution of the 16th Lok Sabha.
Before 2020, MSMEs were classified under the Micro, Small, and Medium Enterprises Development Act, 2006 based only on investment in plant, machinery, or equipment. The classification also differentiated between manufacturing and service-based MSMEs, with different investment limits for each category:
Recognizing these limitations, the government updated the MSME definition in June 2020 as part of the Atmanirbhar Bharat Package. The new classification increased investment limits and, for the first time, introduced annual turnover as a factor. It also removed the distinction between manufacturing and service MSMEs.
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Revised Definition (June 2020)
The 2020 revision was a turning point, introducing turnover-based classification and removing outdated distinctions.
The 2020 revision of the MSME definition had a major impact on growth, credit access, and formalization. By raising investment limits and introducing turnover as a criterion, more businesses qualified for priority sector lending, subsidized loans (ECLGS), and tax benefits. Credit flow improved, with schemes like ECLGS and CGTMSE reducing financial barriers for MSMEs.
The revision eliminated the fear of expansion, encouraging businesses to scale without losing benefits. It also led to greater formalization, improving GST compliance, transparency, and global market integration. Removing the manufacturing vs. service distinction helped IT, fintech, and consulting firms grow freely. With MSMEs contributing 30% to GDP and 45% to exports, the change further had a positive impact on job creation and economic growth as when the businesses expanded they could hire more employees without worrying about losing their MSME status.
While the 2020 MSME revision brought many benefits, it also faced challenges. Implementation was slow, as state policies and banking rules took time to adjust. Access to credit remained difficult, with many businesses struggling with high-interest rates and collateral demands, despite the expanded eligibility. Another major issue was lack of awareness, especially in rural areas, where many MSMEs did not fully understand the new classification or the benefits they could get. These challenges showed the need for faster execution, easier loan access, and better awareness programs to help MSMEs make the most of the revised definition.
Expectations from the new definition
With the 2025 revision, the government has once again expanded MSME thresholds, aiming to remove growth barriers and improve credit access. The new changes address some gaps left by the 2020 reform.
Linking the growth to turnover alone carries a challenge of its own. As raw material costs increase, a number of MSMEs will automatically show a higher turnover, but that will not reflect any material change in their business prospects or scale, as Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME), comments in this discussion with ET. The revised classification enables more companies to avail benefits as MSMEs, including government procurement, financial incentives and tapping investments.
Dr. Ranjeet Mehta, CEO & Secretary General of PHDCCI, commented on the impact of the revision, stating, "The revised thresholds allow businesses more room to expand without the immediate concern of losing the benefits associated with MSME status. This flexibility encourages enterprises to scale operations, adopt new technologies, and improve efficiency."
He also highlighted the credit boost from the revision: "With the reclassification, more businesses can qualify for government schemes, including enhanced credit guarantees. The credit guarantee cover for micro and small enterprises has been increased from ?5 crore to ?10 crore, enabling additional credit of ?1.5 lakh crore over five years."
However, some of the challenges that persist for MSMEs include:
Conclusion
The revised MSME definition under the Union Budget 2025-26 marks a significant step towards fostering growth, innovation, and competitiveness in India's MSME sector. By expanding investment and turnover limits, the government has provided enterprises with the flexibility to scale without the fear of losing benefits. The removal of the manufacturing-service distinction further simplifies classification, ensuring a more inclusive and dynamic business environment. These changes are expected to drive economic expansion, enhance access to finance, and integrate MSMEs more effectively into global supply chains.
To fully capitalize on these reforms, a proactive approach is needed to address persistent challenges. Ensuring targeted support for micro and small enterprises, streamlining credit access, and enhancing awareness about available benefits will be crucial. Additionally, fostering digital adoption through training and incentives can help MSMEs leverage new technologies for growth. Moving forward, the government, industry bodies, and financial institutions must collaborate to create a more resilient and competitive MSME ecosystem—one that not only supports expansion but also sustains long-term economic inclusivity and job creation.
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