Strengthening India's MSMEs: Pathways to Global Competitiveness

India's Micro, Small, and Medium Enterprises (MSMEs) are often hailed as the backbone of its economy, driving employment, innovation, and regional development. With over 63 million enterprises contributing to nearly 30% of the nation’s GDP and 45% of total exports, MSMEs are not only vital for domestic growth but also for India's ambition to become a global manufacturing and innovation hub. However, their potential is hampered by persistent challenges. Addressing these bottlenecks through targeted policy, financial, and infrastructural support can dramatically enhance their global competitiveness.

Key Barriers to Competitiveness

The most pressing challenge for Indian MSMEs is limited access to finance. Although formal credit deployment to MSMEs has increased in recent years, a substantial credit gap—estimated at ₹80 lakh crore—remains. This forces many enterprises to rely on high-cost informal financing, inhibiting investment in innovation, technology, and expansion. Collateral requirements, high interest rates, and a lack of credit history continue to make formal loans elusive for smaller firms.

Skilling is another major hurdle. The majority of MSME workers fall into the low- or semi-skilled categories, restricting their productivity and adaptability. Despite a growing focus on skill development, the mismatch between training and industry needs remains stark. This skill deficit also impairs the adoption of advanced technologies like AI, where most MSMEs lack not only awareness but also the expertise and infrastructure for meaningful implementation.

Furthermore, India’s MSMEs struggle with formalisation. Nearly 90% operate informally, which excludes them from government incentives, financial services, and integration into global value chains (GVCs). Informality also limits scale and innovation, trapping firms in low-value segments of the production process. Initiatives like the Udyam Registration Portal are promising but require further simplification and outreach to bring informal enterprises into the fold.

Strategic Policy Interventions

The government’s cluster-based approach, as outlined in the report prepared by the Institute for Competitiveness for NITI Aayog, offers a viable path forward. By focusing on sector-specific clusters—such as textiles in Tiruppur, automotive in Pune, and pharmaceuticals in Hyderabad—policy can be better tailored to regional and industrial dynamics. Strengthening Institutions for Collaboration (IFCs) within these clusters, including partnerships between universities, industries, and R&D centres, can drive innovation and productivity.

Another vital reform lies in enhancing the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Increasing guaranteed coverage for women-led businesses and lowering premium rates can expand its reach. Additionally, empowering Non-Banking Financial Companies (NBFCs) with better on-lending support and wholesale financing from SIDBI could make credit more accessible, particularly for microenterprises in remote areas.

From a technological standpoint, MSMEs need both financial and strategic assistance to upgrade their capabilities. Tax incentives for R&D, cloud-based affordable AI tools, and industry-academic collaboration can democratize access to innovation. Similarly, addressing the digital divide through e-commerce training, digital marketing support, and modernised supply chains will allow MSMEs to scale beyond local markets.

Building a Resilient Ecosystem

Improving the competitiveness of India’s MSMEs is not solely about removing obstacles—it’s about creating a vibrant ecosystem that fosters growth, innovation, and resilience. This requires coordinated efforts from central and state governments, financial institutions, academia, and the private sector. As India aspires to play a larger role in global trade, empowering its MSMEs through structural reforms, targeted investments, and inclusive policies will be key to transforming these enterprises into engines of sustainable growth.