The Policy and Legal Landscape of

India's MSME Sector: A Comprehensive

Guide for SIDBI Aspirants
The Foundation: Defining and Registering MSMEs
A clear and dynamic definition of Micro, Small, and Medium Enterprises (MSMEs) is the
cornerstone of India's industrial policy. It determines an enterprise's eligibility for a wide array of
benefits, from priority sector lending to government subsidies. The evolution of this definition
reflects a significant shift in policy focus, moving from a static, investment-based classification to
a more holistic and growth-oriented framework.

The Evolution of the MSME Definition: From Investment-Centric to a

Growth-Oriented Model
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, first provided a
comprehensive legal framework for the sector. Under this Act, the definition of an MSME was
based solely on the original investment in plant and machinery for manufacturing enterprises
and in equipment for service enterprises. A key feature of this pre-2020 framework was the
differential treatment of the two sectors, with service enterprises having significantly lower
investment thresholds than their manufacturing counterparts.
This investment-centric definition, however, created an unintended barrier to growth. Many
entrepreneurs became hesitant to invest in new machinery or technology, fearing that the
increased investment would push them out of the MSME category, thereby stripping them of
crucial benefits. This phenomenon, often described as the "fear of growing," was a significant
policy challenge that discouraged scaling up and modernization.
Recognizing this constraint, the government made several attempts to revise the definition. The
MSME Development (Amendment) Bills of 2015 and 2018 were introduced to increase
investment limits and introduce turnover as a criterion, but these bills did not pass. The impetus
for a decisive change came with the announcement of the 'Aatmanirbhar Bharat' (Self-Reliant
India) package in May 2020, which called for a more realistic and objective classification system
to promote ease of doing business and encourage MSMEs to grow. This led to a fundamental
re-evaluation of the definition, aiming to create a policy environment that rewards, rather than
penalizes, growth and investment.

The Current Composite Criteria (Effective from July 1, 2020): A

Detailed Analysis
Effective from July 1, 2020, the Government of India introduced a new, composite definition that
unified the criteria for both manufacturing and service enterprises. This modern framework is
based on the dual parameters of investment in plant and machinery or equipment and
annual turnover. This change provides a more comprehensive measure of an enterprise's size
and scale of operations.
A crucial pro-export incentive was also built into this new definition: the turnover calculation
explicitly excludes any turnover from the export of goods or services. This encourages MSMEs
to tap into global markets without the fear that increased export revenue will cause them to lose
their MSME status.
The current classification is detailed in the table below.
Table 1: Current MSME Classification Criteria (Investment & Turnover)
Classification Investment in Plant & Annual Turnover
Machinery or Equipment
Micro Not more than ₹1 crore Not more than ₹5 crore
Small Not more than ₹10 crore Not more than ₹50 crore
Medium Not more than ₹50 crore Not more than ₹250 crore
Source:
Udyam Registration: The Digital Gateway to the MSME Ecosystem
To align with the new definition and simplify the process of formalization, the government
launched the Udyam Registration portal. This system replaced the earlier, more cumbersome
Udyog Aadhaar Memorandum (UAM) and Entrepreneurs Memorandum (EM-II) processes.
The Udyam registration process is designed to be seamless and entrepreneur-friendly. It is
entirely online, paperless, and free of cost, based on a self-declaration model. The only primary
requirement for a proprietorship is the owner's Aadhaar number. For companies, LLPs, or other
organizational forms, the PAN and GSTIN are required. A significant feature of the Udyam portal
is its integration with the Income Tax and GST networks. This allows for the automatic
verification of an enterprise's investment and turnover figures, creating a dynamic and reliable
database of MSMEs.
This shift towards a unified, digital registration system is more than an administrative
simplification. By linking registration to foundational identity documents like Aadhaar, PAN, and
GSTIN, the government is creating a single, verifiable source of truth for the MSME sector. This
robust database is a powerful governance tool. It allows for more accurate assessments of the
sector's economic contribution, enabling policymakers to design better-targeted schemes and
monitor their impact effectively. Furthermore, this verified data enhances the credibility of
MSMEs in the eyes of financial institutions, which can lead to improved credit assessment and
easier access to finance, a fact underscored by the reliance on this data in recent reports from
key institutions like SIDBI and NITI Aayog.
The benefits of obtaining a Udyam Registration Certificate are substantial and act as a strong
incentive for informal enterprises to enter the formal economy. These benefits include:
●​ Financial Benefits: Udyam-registered enterprises are eligible for Priority Sector Lending
(PSL) from banks. They gain access to collateral-free loans under schemes like the Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and often receive
loans at lower interest rates.
●​ Government Scheme Access: The Udyam certificate is the primary prerequisite for
availing benefits under a multitude of central and state government schemes designed for
MSMEs.
●​ Procurement and Market Access: Registered units receive preference in government
tenders. They are also exempt from paying Earnest Money Deposits (EMD) when bidding
for these tenders and gain access to the Government e-Marketplace (GeM) portal for
public procurement.
●​ Regulatory and Cost Benefits: The registration provides legal protection against
 delayed payments from buyers. It also makes enterprises eligible for subsidies on patent
and trademark registration fees, reimbursement of ISO certification expenses, and
concessions on electricity bills.
●​ Tax Benefits: A key advantage is the eligibility to carry forward Minimum Alternate Tax
(MAT) credit for an extended period of up to 15 years, providing significant financial
flexibility.

The Legal Bedrock: The MSMED Act, 2006

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, serves as the
foundational legal statute for the entire MSME ecosystem in India. Its enactment was a
landmark step, aimed at moving away from a fragmented regulatory environment and providing
a single, comprehensive law to govern the sector.

Core Objectives and Salient Features

The primary objective of the MSMED Act was to "facilitate the promotion and development and
enhancing the competitiveness of micro, small and medium enterprises". It was designed to free
the sector from the "plethora of laws and regulations" and the frequent inspections that
hampered their operations, a long-standing demand highlighted by committees like the Abid
Hussain Committee (1997).
The Act's salient features include:
●​ Legal Classification: For the first time, it provided a statutory definition and classification
for micro, small, and medium enterprises, covering both manufacturing and service
sectors (Chapter III).
●​ Institutional Framework: It mandated the establishment of a National Board for Micro,
Small and Medium Enterprises (NBMSME) to act as the apex advisory body to the
government on all matters concerning the MSME sector (Chapter II).
●​ Promotional Measures: It laid down provisions for various promotional measures,
including credit facilities, procurement preference policies, and infrastructure development
(Chapter V).
●​ Addressing Delayed Payments: It introduced specific legal mechanisms to tackle the
critical issue of delayed payments to Micro and Small Enterprises (MSEs) (Chapter VI).

Critical Provisions: Tackling the Scourge of Delayed Payments

Delayed payments are a chronic problem that severely constrains the working capital and
viability of MSEs. Chapter VI of the MSMED Act introduced powerful provisions to address this
issue.
●​ Section 15 - The 45-Day Mandate: This is the cornerstone of the Act's payment
protection mechanism. It stipulates that a buyer must make payment to an MSE supplier
on or before the date agreed upon in writing. Crucially, this agreed-upon period cannot
exceed 45 days from the day of acceptance of the goods or services. In cases where
there is no written agreement, the payment is due within 15 days of acceptance (this is
legally defined as the "appointed day").
●​ Penal Interest: If a buyer fails to adhere to the timeline specified in Section 15, they are
legally liable to pay compound interest with monthly rests to the supplier. The rate of
 this penal interest is fixed at three times the bank rate notified by the Reserve Bank of
India (RBI). This provision is designed to be a significant deterrent against payment
delays.
●​ Micro and Small Enterprise Facilitation Councils (MSEFCs): To ensure that MSEs
have an effective and accessible recourse, the Act mandates every state government to
establish one or more MSEFCs. These councils have the authority to act as arbitration
bodies to adjudicate disputes related to delayed payments. This mechanism offers a
faster and less expensive alternative to protracted legal battles in civil courts.
●​ MSME Samadhaan Portal: To further streamline the process, the Ministry of MSME
launched the MSME Samadhaan portal. This online platform allows MSEs to file their
grievances regarding delayed payments electronically. The portal automatically forwards
the case to the relevant MSEFC for action, enhancing transparency and accessibility.

Current Affairs - The Game Changer: Section 43B(h) of the Income Tax
Act
The government's approach to enforcing timely payments has evolved from being merely
resolution-oriented to becoming actively coercive. Initially, the MSMED Act established a dispute
resolution framework through the MSEFCs, a reactive measure where an MSE had to file a
complaint after a payment was delayed. The Samadhaan portal digitized this process but did
not change the fundamental mechanism. When data showed that delayed payments continued
to be a crippling issue, a more potent tool was introduced.
Through the Finance Act, 2023, a new clause, Section 43B(h), was inserted into the Income
Tax Act, 1961. This provision represents a strategic linkage of corporate law with tax law and
has game-changing implications. It states that any sum payable by a buyer to a Micro or Small
Enterprise will be allowed as a deductible business expense only in the financial year in which
the sum is actually paid, if the payment is made beyond the 45-day (or 15-day) limit prescribed
in Section 15 of the MSMED Act.
The practical effect is that a buyer who delays payment to an MSE beyond the statutory limit
cannot claim that expense in the year the liability was incurred (on an accrual basis). The
deduction is deferred until the payment is actually made. This directly increases the buyer's
taxable income and tax liability for the year, creating a powerful financial disincentive against
delaying payments. This proactive penalty mechanism is a far stronger deterrent than the threat
of penal interest alone.

The National Board for MSMEs: Composition and Functions

Established under Chapter II of the Act, the National Board for MSMEs is the primary platform
for policy dialogue and review of the sector's development. Its broad-based composition
ensures that perspectives from all key stakeholders are considered. The board is chaired by the
Union Minister for MSME and includes representatives from various central government
ministries, state governments, the RBI, the Small Industries Development Bank of India (SIDBI),
the Indian Banks' Association (IBA), and associations representing MSMEs. Its key function is to
examine the factors affecting the promotion and development of MSMEs and to make
recommendations to the government on policy matters. The MSMED Act, therefore, is not just a
piece of legislation but the foundational pillar upon which the entire support ecosystem,
including all schemes and institutions, is built.

The Institutional Architecture for MSME Support

A robust institutional framework is essential for the effective implementation of policies and
schemes aimed at the MSME sector. India has a multi-tiered architecture with dedicated bodies,
each with a specific mandate, reflecting a nuanced understanding of the diverse needs of
MSMEs.

Ministry of MSME: The Apex Policy-Making Body

The Ministry of Micro, Small and Medium Enterprises is the apex executive body in the
Government of India responsible for the formulation and administration of all rules, regulations,
and laws pertaining to the MSME sector. It acts as the central coordinating agency, designing
and implementing policies and programs through its various attached offices, like the Office of
the Development Commissioner (MSME), and autonomous bodies. Its core functions
encompass the entire spectrum of support, including facilitating credit, promoting technology
adoption, developing infrastructure, enhancing skills, providing market assistance, and
overseeing grievance redressal mechanisms like the CHAMPIONS portal.

Small Industries Development Bank of India (SIDBI): The Principal

Financial Institution
Established on April 2, 1990, under a special Act of Parliament, the Small Industries
Development Bank of India (SIDBI) is the designated Principal Financial Institution for the
MSME sector. Its mandate is threefold: the promotion, financing, and development of MSMEs,
along with coordinating the functions of other institutions engaged in similar activities.
SIDBI's role has evolved significantly from being a simple provider of finance to an architect of
the entire MSME ecosystem. Its key functions include:
●​ Indirect Finance (Refinance): This is SIDBI's traditional and largest area of operation. It
provides refinance to Primary Lending Institutions (PLIs)—such as commercial banks,
Small Finance Banks (SFBs), and Non-Banking Financial Companies (NBFCs)—to
increase their liquidity and capacity to lend to MSMEs.
●​ Direct Finance: To address credit gaps not filled by the conventional banking system,
SIDBI also lends directly to MSMEs. This often involves innovative and tailored financial
products for specific needs like working capital, term loans for capital expenditure, and
foreign currency loans.
●​ Micro-Finance: Through its subsidiary, the SIDBI Foundation for Micro Credit, it plays a
crucial role in the micro-finance sector, assisting in extending credit to the smallest of
enterprises via the Micro Finance Institution (MFI) route.
●​ Fund of Funds Management: SIDBI manages several government-backed Fund of
Funds, such as the Self Reliant India (SRI) Fund. In this capacity, it channels capital to
Venture Capital Funds and Alternative Investment Funds (AIFs), which in turn make
equity investments in high-growth startups and MSMEs.
●​ Promotional and Developmental Role: Embodying its "credit-plus" approach, SIDBI
undertakes a wide range of non-financial activities. These include entrepreneurship and
skill development programs, support for cluster development, and facilitating technology
 adoption.
●​ Nodal Agency and Digital Initiatives: The government has designated SIDBI as the
nodal agency for implementing several key schemes, such as the CLCSS. It has also
been at the forefront of digital innovation, developing platforms like the 'Udyami Mitra'
portal to improve credit accessibility and launching the 'MSME Pulse' report with
TransUnion CIBIL to provide crucial data on MSME credit trends.

National Small Industries Corporation (NSIC): Enhancing

Competitiveness
Established in 1955, the National Small Industries Corporation (NSIC) is a Government of
India Enterprise under the Ministry of MSME. Its mission is to enhance the competitiveness of
MSMEs by providing integrated support services. While SIDBI's core focus is finance, NSIC's
primary focus is on operational and market-facing challenges.
Its core functions include:
●​ Marketing Support: NSIC facilitates MSME participation in government procurement
through its Single Point Registration Scheme (SPRS), which provides exemptions from
EMD. It also organizes trade fairs and forms consortia of small units to bid for large
tenders.
●​ Credit Support: NSIC facilitates credit access by entering into strategic alliances with
commercial banks. It does not lend directly from its own books but acts as a bridge
between MSMEs and financial institutions. It also runs a popular Raw Material
Assistance Scheme that helps MSMEs procure materials on credit.
●​ Technology Support: Through its network of Technical Services Centres and Incubation
Centres, NSIC provides skill development, access to modern machinery, and technical
guidance to MSMEs.

Khadi and Village Industries Commission (KVIC): Fostering Rural

Entrepreneurship
The Khadi and Village Industries Commission (KVIC) is a statutory body created in 1956. It
operates under the Ministry of MSME with the specific mandate of promoting and developing
khadi and village industries in rural areas. Its objectives are deeply rooted in socio-economic
development, aiming to create sustainable non-farm employment opportunities, foster
self-reliance among rural communities, and preserve traditional crafts. KVIC provides support in
the form of skill development, quality control, marketing, and financial assistance. A key
responsibility of KVIC is its role as the national-level nodal agency for implementing the Prime
Minister's Employment Generation Programme (PMEGP).
This deliberate division of labor among institutions ensures that the diverse and heterogeneous
needs of the MSME sector are met with specialized support—financial expertise from SIDBI,
marketing and technology facilitation from NSIC, and a dedicated focus on the rural and
traditional sector from KVIC, all under the policy umbrella of the Ministry of MSME.
Table 2: Key Institutions and Their Core Functions
Institution Core Mandate/Function Key Activities
Ministry of MSME Apex policy-making, Formulates laws (MSMED Act),
administration, and launches schemes, oversees
coordination body. all other institutions.
Institution Core Mandate/Function Key Activities
SIDBI Principal Financial Institution for Indirect/Direct finance, Fund of
promotion, financing, and Funds management, Nodal
development. agency for schemes,
Credit-plus initiatives.
NSIC Enhance MSME Marketing support (Govt.
competitiveness through tenders), Technology
integrated support. upgradation, Raw material
assistance, Credit facilitation.
KVIC Planning and promotion of Nodal agency for PMEGP, Skill
Khadi and Village Industries in development, Marketing of
rural areas. rural/traditional products.
Source:

An In-Depth Review of Key Government Schemes and

Policies
The Government of India has rolled out a comprehensive portfolio of schemes to support
MSMEs at every stage of their business lifecycle. These schemes are not isolated initiatives but
form an interconnected ecosystem designed to address specific challenges, from initial funding
and credit access to technology upgradation and market linkage.
Table 3: Major MSME Schemes: Objectives and Target Beneficiaries
Scheme Name Primary Objective Target Beneficiary Category
CGTMSE Provide collateral-free New and existing Micro Credit
credit by guaranteeing & Small Enterprises
loans. (MSEs).
PMEGP Generate Individuals (>18 years), Credit
self-employment SHGs, Trusts.
through new
micro-enterprises.
PMMY (MUDRA) Fund the unfunded Non-corporate, Credit
micro-enterprises. non-farm small/micro
enterprises.
CLCSS Facilitate technology Existing Micro & Small Technology
upgradation via capital Enterprises (MSEs).
subsidy.
MSME Champions Enhance MSMEs (through Technology
competitiveness clusters and individual
(quality, productivity, units).
innovation).
Public Procurement Provide assured market Micro & Small Marketing
by mandating Enterprises (MSEs).
procurement.
TReDS Address delayed MSME suppliers. Marketing
payments through
invoice discounting.
Scheme Name Primary Objective Target Beneficiary Category
Source:
Credit and Financial Assistance Schemes
Access to finance remains the most critical challenge for MSMEs. The following schemes are
designed to directly address this issue.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

●​ Objective: The primary objective of CGTMSE is to enable banks and financial institutions
to provide collateral-free credit to Micro and Small Enterprises (MSEs). It achieves this by
providing a guarantee cover against default on these loans.
●​ Key Features: The scheme covers both term loans and working capital facilities. The
extent of the guarantee cover ranges from 75% to 85% of the sanctioned loan amount,
with higher coverage for micro-enterprises, women-led enterprises, and units in the
North-East Region.
●​ Current Affairs: In a significant boost to the scheme, the guarantee coverage ceiling was
enhanced from ₹2 crore to ₹5 crore per borrower, effective from April 1, 2023.
Furthermore, the Union Budget for FY24 infused an additional corpus of ₹9,000 crore into
the trust, aiming to facilitate an extra ₹2 lakh crore in credit for MSEs at reduced interest
rates.
●​ Eligibility: The scheme is available for both new and existing MSEs. However, it
excludes enterprises in retail trade, educational institutions, agriculture, and Self-Help
Groups (SHGs).

Prime Minister's Employment Generation Programme (PMEGP)

●​ Objective: PMEGP is a major credit-linked subsidy scheme aimed at generating

self-employment opportunities by supporting the establishment of new micro-enterprises
in the non-farm sector across both rural and urban areas.
●​ Key Features: It provides a margin money subsidy on the project cost, which varies from
15% to 35% depending on the applicant's social category (General/Special Category) and
location (Urban/Rural). The maximum admissible project cost is ₹50 lakh for the
manufacturing sector and ₹20 lakh for the business/service sector.
●​ Implementation: The Khadi and Village Industries Commission (KVIC) is the nodal
agency for implementing the scheme at the national level.

Pradhan Mantri MUDRA Yojana (PMMY)

●​ Objective: Launched to "fund the unfunded," PMMY provides loans of up to ₹10 lakh to
non-corporate, non-farm small and micro-enterprises.
●​ Key Features: The loans, branded as MUDRA loans, are disbursed through commercial
banks, RRBs, SFBs, and NBFCs. They are categorized into three tiers based on the
stage of business growth:
○​ Shishu: Loans up to ₹50,000.
○​ Kishor: Loans from ₹50,001 to ₹5 lakh.
○​ Tarun: Loans from ₹5 lakh to ₹10 lakh.
Technology Upgradation and Modernization Schemes
To remain competitive, MSMEs must adopt modern technology. These schemes provide
financial incentives for such upgrades.

Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS)

●​ Objective: CLCSS facilitates technology upgradation by providing an upfront capital

subsidy of 15% on institutional finance availed by MSEs for the induction of
well-established and improved technologies.
●​ Key Features: The subsidy is calculated on the investment in eligible plant and
machinery, with the subsidy amount being capped at a maximum of ₹15 lakh (i.e., 15% of
a loan up to ₹1 crore). Availing a term loan from an eligible financial institution is a
mandatory prerequisite for the subsidy.
●​ Eligibility: The scheme is primarily targeted at existing MSEs operating in specified
sub-sectors who wish to modernize their manufacturing processes.

The MSME Champions Scheme

●​ Objective: This is a holistic, umbrella scheme launched to enhance the competitiveness

of MSMEs by modernizing their processes, reducing wastage, sharpening design
capabilities, and encouraging innovation to facilitate their national and global reach.
●​ Components: The scheme is structured into three main components:
1.​ MSME-Sustainable (ZED): This component promotes the Zero Defect Zero Effect
certification, which helps MSMEs improve quality, increase productivity, and adopt
environmentally sustainable practices.
2.​ MSME-Competitive (LEAN): This focuses on improving manufacturing
competitiveness by implementing Lean Manufacturing techniques to reduce waste
and increase efficiency.
3.​ MSME-Innovative: This component aims to foster an innovation ecosystem by
providing support for incubation, design interventions, and protecting Intellectual
Property Rights (IPR).

Marketing and Procurement Support Mechanisms

Ensuring market access and timely realization of payments are crucial for the sustenance of
MSMEs.

Public Procurement Policy for Micro and Small Enterprises (Order, 2012)

●​ Mandate: This policy creates a significant captive market for MSEs. It mandates that
every Central Ministry, Department, and Public Sector Undertaking (PSU) must procure a
minimum of 25% of its total annual value of goods and services from Micro and Small
Enterprises.
●​ Sub-targets: To promote social inclusion, the policy includes specific sub-targets within
this 25% quota: 4% must be procured from MSEs owned by Scheduled Caste/Scheduled
Tribe (SC/ST) entrepreneurs, and 3% from MSEs owned by women entrepreneurs.
Trade Receivables Discounting System (TReDS) Platform

●​ Objective: TReDS is a revolutionary digital platform designed to mitigate the problem of

delayed payments. It facilitates the financing or discounting of trade receivables (invoices)
of MSME suppliers against large corporate buyers, including PSUs.
●​ Mechanism: An MSME supplier can upload its invoice on the TReDS platform. Multiple
financiers (banks, NBFCs) can then bid to discount this invoice. The MSME receives the
funds promptly at a competitive interest rate, while the financier collects the full amount
from the corporate buyer on the due date. To ensure participation, the government has
mandated that all companies with a turnover exceeding ₹500 crore must register on a
TReDS platform.

Current Affairs, Sectoral Performance, and Future

Outlook
The MSME sector is dynamic, constantly influenced by budgetary announcements, new policy
initiatives, and evolving economic conditions. A contemporary understanding of these factors is
crucial.

Highlights from Union Budget and Economic Survey (2024-25)

The government's recent fiscal and economic reports continue to place a strong emphasis on
strengthening the MSME sector.
●​ Union Budget 2024-25:
○​ Allocation: A significant outlay of ₹22,137.95 crore was allocated to the Ministry of
MSME, reaffirming its priority status.
○​ Key Announcements: The budget introduced several measures to enhance credit
access. This includes a new credit guarantee scheme for collateral-free term loans
and a directive for Public Sector Banks to develop in-house MSME credit
assessment models based on digital footprints. A major relief for smaller
entrepreneurs was the enhancement of the MUDRA loan limit under the 'Tarun'
category from ₹10 lakh to ₹20 lakh for borrowers with a good repayment history.
●​ Economic Survey 2024-25:
○​ Formalization: The survey highlighted the success of the Udyam Registration
Portal and the launch of the Udyam Assist Platform (UAP) as key steps in
formalizing Informal Micro Enterprises (IMEs) and bringing them within the ambit of
Priority Sector Lending.
○​ Credit and Payments: It acknowledged the positive impact of the CGTMSE
revamp and the growing importance of the TReDS platform in ensuring timely
payments and improving the financial discipline of the ecosystem.
○​ Future Focus: The survey emphasized the need to further reduce the compliance
burden on MSMEs to unlock their full growth potential.

Recent Policy Initiatives and Developments

Beyond the budget, several new schemes reflect a trend towards more targeted and
segment-specific policy interventions.
●​ PM Vishwakarma Scheme (Launched September 2023): This scheme is a prime
example of a granular policy approach. It provides end-to-end, holistic support specifically
to traditional artisans and craftspeople across 18 trades. The support package includes
skill training, a toolkit incentive of ₹15,000, and access to collateral-free credit support,
targeting the unorganized, micro-segment of the artisan economy.
●​ Udyam Assist Platform (UAP) (Launched January 2023): Developed in collaboration
with SIDBI, the UAP is a formalization initiative for Informal Micro Enterprises (IMEs) that
do not have a GSTIN. By registering on UAP, these IMEs receive a registration number
and are treated on par with Udyam-registered MSMEs for the purpose of Priority Sector
Lending, thus bringing a vast number of informal businesses into the formal credit
ecosystem.
●​ Self Reliant India (SRI) Fund: This initiative marks a significant policy evolution from a
purely debt-focused support system to one that includes equity. The SRI Fund is a
₹50,000 crore Fund of Funds that provides equity capital to MSMEs with high growth
potential. By strengthening their balance sheets, this fund helps these enterprises scale
up, grow into larger corporations, and eventually get listed on stock exchanges,
addressing the need for patient, risk-on capital.

Persistent Challenges and the Path Forward: Insights from Recent

Reports
Despite numerous government initiatives, the MSME sector continues to face several
deep-rooted challenges, as highlighted by recent data-driven reports from institutions like SIDBI
and NITI Aayog.
●​ Credit Gap: Access to timely and adequate finance remains the foremost challenge. A
recent SIDBI report estimates the unmet credit demand of the MSME sector to be a
staggering ₹30 lakh crore. Informal borrowing is still prevalent, especially among
micro-enterprises.
●​ Technological and Digital Gaps: A large number of MSMEs continue to operate with
obsolete technology, which hampers productivity and quality. While digital payment
adoption is high (around 90%), the use of more advanced tools like digital lending
platforms (18%) is still low, indicating a gap in digital financial literacy and trust.
●​ Skilled Labour Shortage: Approximately 25% of MSMEs report a lack of skilled
manpower as a significant barrier to growth. This shortage is particularly acute in
specialized sectors.
●​ Market Access: An estimated 70% of MSMEs still rely on traditional marketing methods,
which limits their reach and scalability in an increasingly digital marketplace.
●​ Regulatory Burden: Navigating complex compliance requirements related to taxation,
labor laws, and various licenses continues to be a time-consuming and costly affair for
small enterprises.

The Future Trajectory: Formalization, Digital Integration, and Global

Competitiveness
The future direction of MSME policy in India is centered on three strategic pillars. First is the
continued push for Formalization, moving businesses from the informal to the formal economy
through platforms like Udyam and UAP. This not only provides them with a legal identity but also
makes them eligible for credit and government support. The second pillar is deeper Digital
Integration, which involves encouraging MSMEs to onboard e-commerce platforms, adopt
digital lending, and use technology to improve efficiency. The third and most ambitious pillar is
enhancing Global Competitiveness. Through schemes promoting quality (ZED), efficiency
(LEAN), and innovation, the ultimate goal is to transform Indian MSMEs from being suppliers to
the domestic market into integral players in global value chains, thereby boosting India's exports
and overall economic resilience.

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