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What is the Impact of MSME on the Indian Economy

Published on Nov 7, 2023Updated on Nov 8, 2023

What is the Impact of MSME on the Indian Economy

The impact of MSME on the Indian economy cannot be emphasized enough. Today’s youth need not move too far away from their homes for stable employment. Micro, Small, and Medium Enterprises (MSMEs) are the new fertile ground for ideas, innovation, and growth.

These enterprises are at the forefront of driving manufacturing and industrial expansion, job creation, and GDP growth. However, they confront various challenges, including limited access to finance, infrastructure constraints, obsolete technology, regulatory issues, and a shortage of skilled labour.

Addressing these hurdles becomes essential to harness the potential of MSMEs fully, ensuring they propel India's ongoing economic advancement.

What is MSME Sector in Business?

Based on their size and investment in assets, businesses are classified into micro, medium and small enterprises, also known as the MSME sector. They chiefly conduct operations in manufacturing, trade, and services. Their investments and annual turnover vary but are crucial to their success. MSMEs are known for their immense contribution to the Indian economy and are heavily encouraged by the Indian government in the form of better assistance programmes, tax benefits and accessible credit facilities.

How are MSMEs classified?

Though the categorisations of MSMEs vary from country to country, they are classified in India as follows:

Type of Enterprise

Investments (INR)



Up to INR 1 crore

Less than or equal to INR 5 crores


Up to INR 10 crores

Less than or equal to 50 crores


Up to INR 50 crores

Less than or equal to INR 250 crores

The investment in machinery and equipment and annual profits are two critical factors in their grouping. This classification helps MSMEs have access to better opportunities.

What Is the Role Of MSME in the Economic Development of India?

The MSME sector has a substantial impact on various aspects of the Indian economy:

1. Employment Generation

MSMEs are known for their labour-intensive nature. They provide employment opportunities to a large population, particularly in rural and semi-urban areas.

2. Promotion of Entrepreneurship

MSMEs encourage entrepreneurship and innovation by creating a fertile ground for individuals to start and grow their businesses.

3. Regional Development

MSMEs are often in tier-2 and tier-3 cities and rural areas. This promotes local development and reduces regional economic disparities.

4. Export Promotion

Many MSMEs are involved in export-oriented activities, contributing to India's foreign exchange earnings.

5. Diversification

MSMEs are involved in manufacturing, services, agriculture, and trade. This diversification helps reduce reliance on a single industry and boosts economic resilience.

6. Innovation

MSMEs can quickly adapt to changing market conditions and consumer demands. They often drive innovation in their respective sectors.

7. Reduction of Income Disparities

MSMEs help reduce financial burden and promote inclusive growth by providing opportunities for self-employment and wage employment.

8. Support for Large Industries

MSMEs often serve as suppliers and subcontractors to more prominent industries and contribute to the supply chain.

How do MSMEs contribute to the Indian economy?

The idea of MSMEs emerged after the Ministry of Small-Scale Industries merger with the Ministry of Agro and Rural Industries. With time, the ministry realised the immense potential of this sector in catering to domestic and international markets.

Today, with almost 63 million MSMEs across the country, their contribution to the GDP is a whopping 30%. Indian businesses aim to export $400 billion worth of goods and services by the end of the financial year 2023 and $1 trillion by 2027. MSMEs are believed to play a vital role in achieving this goal.

MSMEs are owned by women and socially disadvantaged groups in 20.73% and 66.27% of cases, respectively. This gives the Indian economy a much-needed push.

MSMEs are primarily located in rural and underdeveloped areas, contributing to economic growth and job creation. They promote innovation and are the backbone of India's startup ecosystem.

They also play a vital role in the supply chain by providing cost-effective and timely services to large corporations.

What are the benefits of an MSME?

The presence of MSMEs is a vital contributor to economic and social interests. Here are some benefits to consider:

  • MSMEs can avail of collateral-free loans, making acquiring inventory easier and boosting growth. They even have easy access to credit for working capital.
  • The low capital-output ratio of MSMEs lets them grow more with minimal investments.
  • They cater to a diverse market, meaning there are high chances of even the most straightforward ideas making good returns.
  • Good government support, ensuring exposure to various support programs, financial assistance, incentives, and technical expertise.
  • Ample employment opportunities to the semi-urban and rural population.
  • Subsidies on interest rates, patent registration, and promoting industrial activities.
  • High adaptability and flexibility help MSMEs survive market uncertainties.

Overall, MSMEs play a vital role in sustaining economic growth, job creation, and fostering innovation in developing and developed economies.

Must Read: Benefits of MSME Loans

What are the challenges that this sector faces?

The MSME sector in India deals with certain challenges from time to time that can impact its long-term growth:

  1. Lack of skilled workforce: This can affect the quality of work and productivity.
  2. Access to finance: MSMEs often need help accessing finance from financial institutions. This is due to a need for more collateral, complex loan procedures, and high interest rates.
  3. Competition: MSMEs face competition from large corporations, e-Commerce ventures, and others.
  4. Technology: MSMEs often use traditional methods and require more capital to invest in the latest technologies. Poor technical expertise and inadequate access to technology contribute to the problem.
  5. Infrastructure: MSMEs are often based in areas with poor infrastructure, such as roads, electricity, and telecommunications. This can make it difficult for them to transport their goods and services.
  6. Regulation: MSMEs often have to comply with a complex set of rules. Being costly and time-consuming, it can divert resources from core business activities.
  7. Emergencies: MSMEs are also vulnerable to external shocks, such as economic downturns and natural disasters.

What are the government schemes available to MSMEs?

The Indian government has recognised the importance of the MSME sector and has introduced various policies, incentives, and support schemes to boost its growth. These include access to credit, subsidies, and ease of doing business.

  • Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE)
  • Pradhan Mantri Mudra Yojana (PMMY)
  • Micro Units Development and Refinance Agency (MUDRA)
  • Stand Up India
  • Prime Minister's Employment Generation Programme (PMEGP)
  • Skill India
  • Make In India

Additionally, the government also provides a variety of other support programs to MSMEs, including marketing assistance, technology support, and infrastructure support.

MSMEs can avail of these schemes and programs by contacting the relevant government agencies or financial institutions. They can also visit the government's website for more information.

It is important to note that each scheme's eligibility criteria and application process may vary. MSMEs are advised to carefully review the details of each plan before applying.

Opportunities in MSME

Working in the MSME sector opens up the door to new opportunities:

  • Promoting and boosting Indian products in the international market.
  • Access to funding options, including loans and subsidies, to support their growth and development.
  • The government actively promotes and supports MSMEs through policies, incentives, and programs, creating a favourable environment for their success.
  • MSMEs can cater to the rising demand in the domestic market, with evolving consumer preferences.
  • Ease of accessibility to budding entrepreneurs because of low capital requirements.
  • MSMEs can provide workforce training and skill development opportunities, contributing to human capital development.

MSME entrepreneurs can take advantage of these opportunities by analysing market trends, understanding the needs of their customers, and networking with other MSMEs.

Must Read: Things You Need To Know About MSME Loans For Restaurants In 2023

Why are MSMEs so important?

India's most significant advantage over other nations is its substantial human capital. Today, it houses the world's third-largest pool of MSMEs. Moreover, they significantly contribute to India's exports, with 49.5% of products in 2020-21 being MSME-generated.

MSMEs have become the path to driving industrialisation in the rural sectors. By 2025, the Indian Government aims to double its economy to $5 trillion. MSMEs play a significant role in this by creating numerous job opportunities.

The micro sector, with 630.52 lakh enterprises, employs around 97% of the industry's workforce. The small sector, with 3.31 lakh MSMEs, employs 2.88% of the workforce, and the medium sector, with 0.05 lakh MSMEs, employs 0.16% of the total MSME sector workforce.


MSMEs play a vital role in India's economic landscape. Being the backbone of the Indian economy, substantial contributions to GDP, job creation, exports, and innovation are instrumental in achieving the government's vision of elevating India into a $5 trillion economy by 2025.

Let SMFG India Credit support your vision with tailored financial solutions. Apply for our business loans today and fuel your business for a prosperous tomorrow.


What is the impact of SMEs in India?

Today, MSMEs contribute up to 30% of the country’s GDP. It plays a vital role in the industrialisation of the rural sector in cost-efficient ways. MSMEs also have a significant role in providing employment opportunities and exports.

What is the function of MSME in India?

MSMEs are vital to the success of the Indian economy as they serve a variety of purposes:

  • Employment generation;
  • Aiding economic growth;
  • Seat of innovation of new technologies, products, services and processes.
  • Regional development;
  • Boost exports;
  • Promotion of local heritage and its preservation.

Who is eligible under MSME?

As the name suggests, all medium, micro and small enterprises fall under the category of MSME. They can be categorised as:

  • Micro: < ₹25 lakh investment, < ₹5 crore turnover.
  • Small: < ₹5 crore investment, < ₹50 crore turnover.
  • Medium: < ₹10 crore investment, < ₹250 crore turnover.

What are the types of MSME?

MSMEs are broadly classified into two types:

  • Service enterprises
  • Manufacturing enterprises

What is the turnover MSME limit?

The turnover criteria for MSMEs include:

  • Micro businesses: ₹5 crore
  • Small businesses: ₹50 crore
  • Medium businesses: ₹250 crore

Is GST registration mandatory for MSME?

It is compulsory for all businesses with a turnover above ₹20 lakh to register for GST. However, certain MSMEs may be exempted in exceptional circumstances.

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