The evolution of India’s MSME sector—a view from 2023

23 June, 2023

Across the world, June 27 is earmarked to celebrate the Micro, Small, and Medium Enterprises (MSMEs) and their immense contribution to the economy. The MSME sector is recognised as a significant player in India's economic growth and development. It is credited for generating ample employment opportunities and promoting equitable distribution of national income. Here’s a peek at the sector's progress and what its future looks like.

How has the MSME sector in India evolved over the years?

Small-scale businesses have been a hallmark of the Indian economy since independence. Over the last five decades, the MSME sector has evolved to show itself as a vibrant and dynamic component of the economy.

  • Initially, the non-agricultural MSME sector was heterogeneous and consisted of traditional industries. These included khadi, silk, coir, cottage and village industries, Small Scale Service and Business Enterprises (SSSBEs), and Small Scale Industries (SSIs). Today, all these industries are clubbed together under the umbrella term of Small Scale Industries (SSI).

  • In 2006, the Micro, Small, and Medium Enterprises Development (MSMED) Act was enacted. This statute aimed to incorporate all the diverse industries, the service sector, and medium enterprises.

As a result, the MSME sector in India is classified into two categories: the manufacturing and service industries. Furthermore, the industries are classified as micro, small, and medium based on the investment made toward machinery and equipment.

MSMEs contribute towards exports, entrepreneurial development, upliftment of rural and backward areas, and employment generation. The MSME sector has been creating over 110 million jobs in areas such as manufacturing, non-captive electricity generation and transmission, trade and other service, across rural and urban areas in the country.

Changes in the MSME sector per the Union Budget 2023

The Finance Minister (FM) highlighted the following changes in the MSME sector while presenting the Union Budget 2023:

  • The Credit Guarantee Scheme for MSMEs will be revamped through infusion of ₹9,000 crore in the corpus, further enabling additional collateral-free credit of ₹2 lakh crore. Also, the cost of such credit will be reduced by about 1%.

  • The FM also announced that the buyers may not claim tax deductions unless they pay the MSMEs first. This will ensure that MSMEs receive timely payments.

  • The FM has also proposed to set up an “Entity DigiLocker” that can be used by MSMEs, large businesses and charitable trusts to store and share documents online with financial authorities, regulators and banks.

  • The government and government entities will return 95% of the forfeited amount to MSME businesspersons who were unable to fulfil their contracts during the Covid period.

What are the challenges for the MSME sector today?

The sector is expected to shoulder a substantial portion of the country's economy. But there are some challenges that lie ahead:

  • Need for digitisation: Owing to problems like the dearth of proper infrastructure, finance, and limited knowledge, the MSME sector has been slow in going digital. Digitising the sector could help in enhancing efficiency and reliability, cutting costs, and keeping up with trends.

  • Importance of business knowledge: With growing competition, it is imperative for MSMEs to have a thorough grasp of the opportunities, challenges, in-depth know-how, trends, and risks of the industry to run a successful business. The right business strategy can help a company scale up.

  • Problems related to funding: Many MSMEs may not have all the financial documentation in place or enough access to digitisation in order to take advantage of government schemes. There is also a challenge with collateral as the perceived risk of funding MSMEs is higher. Cash flow and working capital issues are challenging, especially in instances where payments are delayed. While protections exist under the MSMED Act, such as penalties for delayed payments, the fear of losing long-term business means that these protections are rarely ever invoked.

How can HDFC Bank’s MyBusiness help?

HDFC Bank realises the integral role MSMEs play in maintaining and growing our economy. Our effort is to ensure that business owners like you have the right tools to scale up, grow and succeed. With MyBusiness, you can easily access a range of solutions designed to fulfil all your business needs.

By enabling Business Banking Solutions, Easy Loans, Trade Services and Digital Solutions, MyBusiness can allow you to focus on growing your business and to take advantage of the incredible opportunities that lie ahead. Click here to get started with HDFC Bank’s MyBusiness.

​​​​​​​​​*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.