MSME Sector In India – Significance,Challenges & Initiative-GS 3 Mains(UPSC)

What is MSME?

  • The government under Atmanirbhar Bharat Abhiyan (Self-reliant India Campaign) changed the basic definition of MSMEs and eliminated the distinction between manufacturing and service sector MSMEs.
  • Now the definition of MSMEs is-
Existing MSME Classification
Criteria: Investment Plant and Machinery or Equipment
Classification Micro Small Medium
Mfg. Enterprises Investment < Rs. 25 lakh Investment < Rs. 5 Crore Investment < Rs. 10 Crore
Services Enterprises Investment < Rs. 10 lakh Investment < Rs. 2 Crore Investment < Rs. 5 Crore
Revised MSME Classification
Composite Criteria: Investment and Annual Turnover
Classification Micro Small Medium
Manufacturing & Services Investment < Rs. 1 Crore


Turnover < Rs. 5 Crore

Investment < Rs. 10 Crore


Turnover < Rs. 50 Crore

Investment < Rs. 20 Crore


Turnover < Rs. 100 Crore

  • The change in definition of MSMEs will also help because “turnover” is the more efficient way to identify an MSME.
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  • It has been a long-standing demand from industry to hike the investment limits, as with inflation, units often cross the threshold that will bring them benefits.


    Employment creator: 

      • MSME is 2nd largest employment provider after agriculture sector.
      • It provides 80% of jobs in the industry with just 20% of the investment.
      • There were over 6.3 crore MSMEs in the country, they employ 11 crore people.
      • They also check rural-urban migration by providing people living in isolated areas with a sustainable source of employment.

    Economic growth and exports:

      • It contributes about 31% to the nation’s GDP, 45% share in the overall exports and 34% share in the manufacturing output as per 2017 report.
      • Non-traditional products like sports goods, readymade garments etc. account for more than 95% of the MSME exports. As these products are mostly handcrafted and hence eco-friendly, there exists an enormous potential to expand MSME led exports.
      • Moreover, MSMEs act as ancillary industries for large-scale industries since they provide the latter with raw materials, important components etc.
      • Small and Medium Enterprises (SMEs) until 2016 accounted for a 17.5% share of the Indian defence market.

    Inclusive growth:

      • MSMEs drive inclusive growth since it develops the lives of the most vulnerable and marginalized sections in India who are the majority MSME owners.
      • Thus MSME sector empowers people by breaking the cycle of poverty and deprivation.
      • It is also because the MSME sector in India mostly depends on people’s skills rather than their wealth or capital.



    • RECENTLY, a change in the external environment, has led to a large number of MSMEs becoming non-performing asset (NPAs)
      • Demonetization of high-value currency notes in November 2016.
      • Hasty implementation of the goods and services tax in 2017
      • liquidity crunch triggered by a series of debt defaults by group companies of Infrastructure Leasing and Financial Services Ltd in 2018.
      • a ban on plastics or ‘dumping’


      • Lack of scaling up and expansion or confined to the rural area🡪  due to the following challenges.
      • Access to capital🡪  Around 40% of the small enterprises depend on the informal sources of credit or loan.
      • Lack of latest techs🡪 Less productivity + Less competitive compared to imported products and services.
      • Deficiencies in basic infrastructural facilities🡪  such as water, electricity, road or rail and telephone connectivity etc.
      • Bureaucratic red tape🡪  difficulties in getting multiple statutory clearances with respect to electricity, environment, labour etc.
      • Lack of skilled labour
      • Raw material availability



      • MSMED Act of 2006 🡪 included services sector in the definition of MSME, apart from extending the scope to Medium Enterprises.
      • Trade Receivable Discounting System (TReDS)🡪  an exchange driven trading mechanism aims at ending the endless delays faced by MSMEs in receiving payments for their supplies to bigger industries.
      • Technology Acquisition and Development Fund (TADF)🡪
    • To facilitate the acquisition of clean, green and energy efficient technologies by MSMEs.
    • Launched under National Manufacturing Policy
    • Implemented by the Department of Industrial Policy & Promotion .(DIPP)


      • The National Apprenticeship Promotion Scheme🡪  encourages third-party agencies to provide basic training when in-house training infrastructure not available.
      • Indian Enterprise Development Service (IEDS)🡪
    • A special cadre established under MSME ministry
    • To reform the prevalent regulatory regime that hindered the MSME growth.


      • Trade   Related   Entrepreneurship   Assistance    and    Development   (TREAD)🡪 launched by MSME ministry to promote women entrepreneurs by providing loan/credit.
      • Zero Defect-Zero Effect (ZED) Scheme🡪  to rate and handhold all MSMEs for producing top quality products utilizing clean technology.
      • Mudra Bank🡪
    • MUDRA Bank = Micro Units Development and Refinance Agency Bank.
    • The Rs 20,000 crore MUDRA Bank seeks to provide refinancing to small and medium enterprises, especially those from SC & ST.
    • The idea is to refinance micro-finance institutions (MFIs) through Pradhan Mantri Mudra Yojana.
    • This bank would be responsible for regulating and refinancing all MFIs which are in the business of lending to MSME.


      • MSME Sambandh🡪  A portal that will help in monitoring the implementation of the Public Procurement from MSMEs by Central Public Sector Enterprises (CPSEs).
      • PSBs as Udyami Mitras🡪 Public Sector Banks (PSBs) to enable faster registration, discounting and financing for MSMEs and revive stressed MSMEs.
      • Udyami Mitra Portal🡪 launched by SIDBI to improve credit accessibility and handholding services to MSMEs.
      • 2018 Amendment to MSME Act 2006🡪 It will encourage ease of doing business, make the classification criteria growth-oriented and align them with the new GST regime.
      • MSME Samadhaan🡪 Empower MSMEs to directly register their cases related to delayed payments by Central Ministries/Departments/CPSEs/State governments.
      • PM Employment Generation Programme 🡪 Credit linked subsidy programme under MSME ministry.
      • Revamped Scheme of Fund for Regeneration of Traditional Industries (SFURTI)🡪  organizes traditional industries and artisans into clusters and make them competitive by improving their marketability & equipping them with improved skills.
      • A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE) 🡪
          • Creates new jobs & reduce unemployment,
          • Promotes entrepreneurship culture
          • Facilitates innovative business solution etc.


    • National Manufacturing Competitiveness Programme (NMCP) 
    • .MSMEs Cluster Development Programme .
    • MSME Outreach Programme in 2018.
    • Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)- to make available collateral-free loans.
    • Credit linked Capital Subsidy Schemeto upgrade the technology.
    • FM provides Covid-19 relief, no fresh insolvency proceeding against MSMEs for 1 year– raised the minimum threshold to initiate insolvency proceedings to Rs 1 crore from Rs 1 lakh.
    • Amid Covid-19, MSME receivables from Gov and CPSEs to be released in 45 days.
    • Subordinate debt for NPA/stressed MSMEs- provision of Rs. 20000 Crore under Atmanirbhar Bharat Abhiyan.
    • Fund of Funds for MSMEs- operated through Mother Fund and few daughter funds.
    • EPF support under Pradhan Mantri Garib Kalyan Package .(PMGKP)
    • Global tenders will be disallowed in Government procurement tenders up to Rs 200 crores. 


    The aim is to boost MSME sector by means of facilitating their growth and expansion.

    Access to Facilities🡪 

      • It will run for 100 days covering 100 Districts throughout the country.
      • Various central ministers will visit these districts to assess various facilities being extended to the MSME sector by the government.
      • Under it, entrepreneurs will be encouraged to come forward and make the best use of these facilities including access to credit and market etc.

    Access to Credit🡪 The government will launch a 59-minute loan portal to enable easy access to credit for MSMEs.Loans up to Rs. 1 crore will be granted approval through this portal, in just 59 minutes.

    Interest Subvention🡪 The government will provide 2% interest subvention for all GST registered MSMEs on fresh or incremental loans.


      • MSMEs with turnover more than Rs. 500 crore will now be mandatorily brought under Trade Receivables e-Discounting System (TReDS).
      • This will facilitate entrepreneurs to access credit from banks, based on their upcoming receivables.
      • This will help address their problem of cash delays.

    Market access🡪 For access to markets for entrepreneurs, the government made it mandatory for public sector enterprises to procure 25% of their purchases from MSMEs. Out of 25% procurement, 3% should be from women entrepreneurs.

    Technology Up gradation🡪 The government will establish tool rooms across the country as a vital part of product design.

    Ease of Doing Business🡪 Clusters will be formed for pharma MSMEs. 70% of the cost for establishing these clusters will be borne by the government. Simplification of government procedures in terms of filing returns, clearances etc.

    Social Security for MSME sector employees🡪 A mission will be launched to ensure that the MSME employees have Jan Dhan Accounts, provident fund, and insurance.



    RBI expert committee led by U K Sinha on MSMEs   – (Aim : undertake a comprehensive review of the sector and to identify causes and propose long-term solutions led by U.K. Sinha)


    • It also recommended amendment to the MSMED Act, requiring all MSMEs to mandatorily upload all their invoices above an amount to be specified by the government, from time to time.
    • This mechanism will entail automatic display of the names of defaulting buyers and also act as moral suasion on them to release payment to these suppliers.
    • The committee also suggested forming a government-sponsored Fund of Funds of ₹10,000 crore to support venture capital and private equity firms investing in MSMEs.
    • Panel suggests ₹5,000 crore stressed asset fund for MSMEs fund could operate on the lines of the Textile Upgradation Fund Scheme.
    • “SIDBI should deepen credit markets for MSMEs in underserved districts and regions by handholding private lenders, such as non-banking financial companies and micro finance institutions. Further, they must develop additional instruments for debt and equity which would help crystallize new sources of funding for MSMEs and MSME lenders.
    • portal also cater to new entrepreneurs, who may not necessarily have information like GSTIN, income-tax returns and bank statement.
    • Introduction of adjusted priority sector lending guidelines for banks to specialize in lending to a specific sector, doubling the collateral-free loan limit to ₹20 lakh and providing insurance coverage to MSME employees by the government.
    • Group policies for death and accident cover for MSME entrepreneurs need to be developed with insurance cover significantly higher than the cover currently offered by the Pradhan Mantri Suraksha Bima Yojana and the Pradhan Mantri Jeevan Jyoti Bima Yojana, two government-backed insurance schemes.


    • There is a growing number of schemes, portals, programmes etc. for the MSME sector. Hence, there is a need to develop a better communication strategy and the use of new age media tools like social media.
    • To make the schemes more demand-driven, it is imperative to involve the stakeholders at the design stage itself.
    • Furthermore, the number of different decision-making levels in the government needs to be reduced and enable flexibility on operational issues.
    • Draft National MSME Policy should be implemented soon which proposes National MSME Authority headed by the Prime Minister and also empowers the centre to change investment limits instead of being forced to go the Parliament every time.

    According to NITI AAYOG STRATEGY DOCUMENT for India @ 75 Years 🡪  MSME should be supported as follows

    • Setting up of mega parks and manufacturing clusters in labour intensive sectors with common facilities to reduce costs and improve quality. It is also recommended that state governments should set up plug and play parks (flatted factories) to ensure international productivity standards.
    • Workers of industrial units in the new mega parks should have decent accommodation within reasonable proximity of the work place.
    • An expert committee should examine sector-specific pain points and make its recommendations within three months.
    • The Department of Public Enterprises (DPE) should ensure registration of all public sector units (PSUs) on the Trade Receivables Discounting System (TREDS) portal.
    • Initiate a small business research programmers in some select ministries for encouraging R&D in MSMEs.                            



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