MSMEs in India: The Unfinished Agenda

India is a diverse country full of nuances, and its so-called "MSME" sector is no exception to this quirky tapestry.

- Dr. Lalitagauri Kulkarni

India’s Micro, Small and Medium Enterprises commonly known as ‘‘MSMEs’’ are routinely described as the backbone of the economy. The phrase appears with such frequency that it risks becoming a clich. The MSME sector is a no-nonsense contributor to the economy, accounting for around 30 percent of India's GDP and more than 45 percent of exports, prominent source of employment. These numbers are impressive, but they can sometimes obscure the fact that MSMEs are not a homogeneous category.

Identity Crisis-India's MSME sector is as diverse as the country itself. A neighbourhood tailoring unit, a tiny fruit-juice shop around the corner, makeshift chai wallahs, seasonal Diwali diya stalls, temple enterprises, countless ancillary manufacturing units supplying intricate components to large industries, and a technology-enabled software firm in service sector with multinational clientele seem worlds apart. Yet under India's MSME framework, all are classified using the same two criteria: annual turnover and investment. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 groups these vastly different enterprises into the MSME category based solely on these measures.

Under the current definition, a micro enterprise has turnover not exceeding ‡10 crore and investment in plant, machinery, or equipment of up to ‡2.5 crore. A small enterprise has turnover of up to ‡50 crore and investment of up to ‡25 crore, while a medium enterprise can have turnover of up to ‡500 crore and investment of up to ‡125 crore. This broad classification often masks important differences in their needs, constraints and growth trajectories. It fails to identify the nano enterprise sector. Micro enterprises are estimated to form more than 90% of the MSME sector and nano enterprises having turnover less than Rs 1 crore form 99% of the micro sector.