Barriers to Growth for Indian MSMEs

Micro, small, and medium enterprises (MSMEs) in India face significant hurdles in scaling up due to expensive, time-consuming paperwork, and lack of access to financial aid and marketplaces.

According to the Ministry of Micro, Small, and Medium Enterprises, there are around 4 crore MSMEs in India. These enterprises contribute approximately 30% to India’s GDP and 45% to exports. The Indian government has implemented various policies to boost MSME production and aims to increase their GDP contribution to 50%. However, scaling up from micro to small and medium enterprises remains a major challenge.

Micro enterprises, which account for 97.7% of all MSMEs, have investments of less than Rs 1 crore and annual turnovers of about Rs 5 crore. Small enterprises make up 1.5% of MSMEs, with investments up to Rs 10 crore and turnovers up to Rs 50 crore. Medium enterprises, comprising 0.8% of MSMEs, have investments up to Rs 50 crore and annual revenues up to Rs 250 crore.

About 85% of micro-enterprises, roughly 3.3 crore units, are located in rural areas and are often family-owned, operating without additional labor. Major obstacles for these enterprises include lack of capital and the burden of certification and documentation. Additionally, their rural locations make it difficult to secure financial assistance from banks.

An MSME entrepreneur from Bulandshahr, Uttar Pradesh, reported spending around Rs 60,000 on necessary documentation before receiving a bank loan of Rs 6 lakh after an 11-month wait. The extensive paperwork and certifications required are both time-consuming and costly, with significant expenses for services like CA fees.

Experts note that MSME entrepreneurs often receive personal loans, as their enterprises are not located in industrial areas, resulting in high interest rates.

Around 14% of micro enterprises, or 6 million units, have potential for growth. However, they face challenges in supply chain management, bank repayments, and financial management. There is a lack of local subcontractors who specialize in these areas, which hinders their ability to scale up.

Micro enterprises also struggle to compete with larger companies in digital marketplaces. Visibility on platforms like Amazon and Flipkart is a challenge if they do not pay for promotions, leading to lower product rankings in search results.

Despite increased government funding for MSMEs, with the Ministry of MSME's budget rising from Rs 6,513 crore in FY19 to Rs 25,823 crore in FY23, and the establishment of a Rs 1 lakh crore fund for interest-free loans, micro enterprises in semi-urban and rural areas still struggle to obtain necessary financial assistance. In FY24, these areas accounted for only 22.54% of total bank lending.