Why MSMEs don’t grow in size? – UPSC GS3

What is issue with MSMEs

  • Despite MSME contributing 20% of the GDP and employing about 110 million workers,  we have failed to make bold policy-moves to make it more productive and competitive.
  •  MSMEs are not becoming ‘larger’ and more dynamic, with 99% of the estimated 60 million being micro-enterprises with limited aspirations.
  • At the core of this lack of competitiveness is a structural issue.

Addressing the structural challenges


  • Consider  India’s largest textile cluster vs Bangladesh’s largest.
  • More than 70% of the units in Tirupur are micro-enterprises with less than 10 employees while only 20% of the units in Narayanganj in Bangladesh have less than 10 employees.
  • This factor makes the cluster in Bangladesh more competitive and helping Bangladesh’s exports grow faster than India’s.
  • Though  Bangladesh has other advantages also, but this structural difference is critical.

Relation between size and productivity

  • Productivity data from manufacturing MSMEs in OECD show that the productivity of medium firms (50-250 people) could be as much as 80-100% higher than that of micro firms (<9 employees).
  • Growth in scale allows them to invest in people to improve skills, in better technology & processes, and in innovation.
  • The most-competitive of them grow from their small beginnings to become world-beaters.
  • This push to grow and improve capabilities and productivity is central to dynamism of any country’s industrial structure.
  • This dynamism of micro-enterprises has been one of the less-reported policy levers behind China’s rise as an industrial powerhouse.

What stops MSMEs in India from growing?

  • Our policy-legacy of highly restrictive asset-based definition which has only recently been relaxed, coupled with a mindset, and, policies, to support the ‘small is beautiful’ narrative.
  • Overly complex regulatory regime doesn’t differentiate enterprises on their scale, other than the really tiny ones, in terms of compliance needs.
  • For example, if a unit has more than six employees, the trade union law becomes applicable, If a unit has more than 10 employees, the Factories Act is applicable.
  • Small enterprises thus face the same multitude of regulatory requirements as larger ones, and end up having compliance costs account for a higher percentage of revenue.
  • For the tiny/micro units, there is simply no incentive to grow and enter the formal economy.

Policy intervention needed

1) Getting MSMEs into formal credit system

  • To do this, we need to adopt an approaches that can help banks and NBFCs move away from asset-backed lending, towards some form of cash-flow-based lending.
  • Small retailers are outside the formal credit system, unable to invest, modernise and grow, given they lack fixed ‘assets’.
  • But, all of them are linked to, and sell, brands of well-known, large companies.
  • If banks and NBFCs work with these companies and use anonymised data on sales and credit-performance to develop credit-scores for lending to them?
  • Similar innovative ways could help cover other micro-unit segments.

2) Simplified tax and regulatory regime

  • The second policy intervention needed is to de-average and implement a simplified tax and regulatory regime for MSMEs.
  • This would also reduce the cost of compliance.

3) Development of digital platform

  • The third intervention, appropriate for digital era, is to develop a comprehensive ‘digital platform’ for the sector.
  • This will call for a mandatory, unique identifier for all.
  • The platform will have to be linked to different relevant databases.


As India launches the Atmanirbhar Bharat Abhiyan to reignite growth of the economy for a post-COVID world, building such a globally-competitive MSME has to become one of the initiative’s core pillars. Only then can our industry improve and sustain its global competitiveness.
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