Micro, Small and Medium Enterprises (MSMEs)

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 gave India, for the first time, a single legal framework covering both manufacturing and service enterprises under the common term MSME. The classification criteria were revised with effect from 1 July 2020 to use a composite test based on both investment in plant and machinery or equipment and annual turnover, replacing the earlier system that classified manufacturing and service enterprises separately and used investment alone.

Students should note that these limits are fixed by government notification and have been revised more than once since the MSMED Act, 2006 was passed, so the current figures should always be understood as being subject to future revision rather than as a permanently fixed number.

Role of MSMEs in the economy. MSMEs are frequently described as the backbone of Indian industry because they are the second-largest employer in the country after agriculture, requiring comparatively little capital to create each unit of employment. They contribute a significant share of manufacturing output and of India's total exports, act as ancillary and feeder units supplying components to large-scale industry, encourage the spread of entrepreneurship into small towns and rural areas, and help disperse industrial activity more evenly across regions than large-scale industry typically does.

Problems of MSMEs. Despite their importance, MSMEs continue to face several persistent constraints: difficulty in accessing timely and adequate finance at reasonable interest rates; delayed payments from large buyers that strain working capital; limited access to modern technology and skilled manpower; weak marketing networks and bargaining power compared with large firms; inadequate infrastructure, particularly in power supply and connectivity; and rising competition from cheaper imports and from large domestic firms. …