NITI Aayog’s Report Makes Multiple Recommendations for Enhancing Competitiveness of MSMEs
Micro, Small, and Medium Enterprises (MSMEs) play a vital role in India’s economic development by significantly contributing to growth, employment, and exports. They contribute around 30% to the country’s GDP and account for over 45% of its exports. To help understand and address the challenges faced by MSMEs, NITI Aayog released a report titled ‘Enhancing MSMEs Competitiveness in India’, in which it made multiple recommendations.
Micro, Small, and Medium Enterprises (MSMEs) play a vital role in India’s economic development by significantly contributing to growth, employment, and exports. They contribute around 30% to the country’s GDP and account for over 45% of its exports. As the second largest source of employment after agriculture, MSMEs provided jobs to about 110 million people in 2022-23 through non-agriculture unincorporated enterprises, with more than half of them based in urban areas. India’s enterprise landscape is dominated by micro enterprises, with around 73.4 million non-agriculture enterprises operating nationwide, as per the Annual Survey of Unincorporated Sector Enterprises, 2023-24. Despite their economic significance and employment impact, most of these enterprises remain small and face significant challenges.
To help understand and address the challenges faced by MSMEs, NITI Aayog released a report titled ‘Enhancing MSMEs Competitiveness in India’, prepared with the Institute for Competitiveness. The report gives a blueprint to boost the growth of MSMEs through better access to finance, skill development, innovation, and markets. Using firm-level data and the Periodic Labour Force Survey (PLFS), it highlights key problems and suggests ways to help MSMEs become part of global value chains. It focuses on four main sectors, viz: textiles and apparel, chemical products, automotive, and food processing. In this story, we look at the important issues discussed in this report.
Access to finance was the biggest challenge for 1 in 5 MSMEs
An enterprise survey by the World Bank covering business owners and top managers in 9376 firms interviewed from December 2021 through September 2022 identified key challenges faced by MSMEs in India. The most pressing issue was access to finance, reported by 23.5% of manufacturing firms and 20% of service firms. High tax rates also posed a major challenge, particularly for service sector businesses, along with burdensome customs and trade regulations. A significant number of firms, over 11% in both sectors, struggled with practices of the informal sector. Other concerns included corruption, limited access to land, and a shortage of adequately skilled workers. Less commonly reported issues were related to electricity, crime, courts, and political instability.
Overall, the survey reveals that financial constraints, regulatory burdens, and informal competition are the primary barriers limiting the competitiveness and growth potential of MSMEs across both manufacturing and service sectors in India.
Formalization, skill gap, and access to credit are some key challenges identified in the report
The NITI Aayog report noted that many MSMEs operate informally, restricting access to finance and markets. While formalisation initiatives such as the Aadhaar Memorandum and Udyam Portal exist, unregistered micro-enterprises remain prevalent, and even formalised firms may face high operating costs and reduced exemptions.
A comparison of RBI data for September over the past four years shows a steady rise in the credit share of micro and small enterprises, increasing from 14% in 2020 to 20% in 2024. Medium enterprises have also seen gradual improvement, with their share rising from 4% to 9% over the same period. This upward trend indicates growing bank credit deployment to MSMEs, reflecting the impact of policy measures and institutional efforts aimed at improving credit access for these sectors. However, Indian MSMEs continue to face a significant credit gap due to perceptions of high risk, lack of collateral, complex procedures, and limited financial literacy, which act as barriers that restrict access to both formal and alternative financing sources.
Regarding the skill gap, the report noted that there was significant improvement between 2014 and 2022. However, this was not in par with the pace of development in the previous decade. It highlighted that the diverse and scattered nature of MSMEs demands focused skill development efforts. Strategies such as cluster-based training, sector-specific occupational standards, cost-sharing models for employee upskilling, and a better understanding of unregistered MSMEs’ needs are essential to bridge the skill gap and enhance competitiveness.
Adoption of new technology is limited due to poor infrastructure and lack of skilled labour
Indian MSMEs also struggle with adopting new technologies and diversifying products due to poor infrastructure, lack of skilled labour, high investment costs, and limited market awareness. These barriers keep them confined to local markets with low-tech, low-profit products, underscoring the need for targeted policy support, better skills training, and improved access to finance, market insights, and infrastructure.
As previously noted, MSMEs in India face significant tax-related challenges, including high compliance costs, complex procedures, and perceptions of unfairness in the system, which discourage formalisation and limit access to benefits like credit and market linkages. While reforms like GST have improved operational efficiency and transparency, issues such as low tax-to-turnover ratios, limited input credit access, and the need for tax system simplification persist.
MSME sector in India is skewed toward small enterprises
The report highlights the “missing middle” phenomenon, referring to the absence or underrepresentation of medium-sized enterprises (MSEs) in the manufacturing sector. The MSME sector in India is skewed toward small enterprises, with a stark absence of micro and medium firms due to high regulatory burdens and limited access to finance and technology. This “missing middle” reflects structural and policy-induced barriers that discourage growth beyond a certain scale.
Recommendations made at the national, state, and cluster levels
The report has made recommendations at the national, state, and cluster levels. These are listed below:
At the national level, enhancing MSME competitiveness requires several strategic adjustments. The Credit Guarantee Fund Trust for Micro and Small Enterprises should undergo increased regulatory oversight to ensure financial discipline while balancing fund availability. Reinstating norms under Priority Sector Lending to allow loans to NBFCs for further lending to MSMEs as indirect finance could encourage credit flow to micro-enterprises. Additionally, SIDBI needs to expand its loan portfolio and invest in smaller NBFCs to strengthen MSME financing. The Finance Act 2023’s Section 43B(h) should be reformed to address tax flow disruptions, and greater awareness of government resources is essential to support MSME growth.
At the state level, there is a need for greater awareness and effective utilisation of MSME schemes and incentives. States must improve information dissemination through targeted awareness campaigns. Policies must be regularly evaluated to ensure performance data is accessible and greater transparency is enforced. There is also a lack of interaction between stakeholders and policymakers, which can hinder growth. Strengthening stakeholder participation via MSME-specific forums is vital. Many state policies fail to address the core issues affecting MSME growth, and a more coordinated and uniform approach across regions would ensure more effective policy implementation.
Cluster-level recommendations suggest a more sophisticated and integrated approach to cluster development. India’s cluster policy should focus on geographic footprints and local economic linkages rather than just statistical classifications. Common Facilitation Centres need upgrades to align with international standards, fostering collaboration between universities, research institutes, and private entities. Policymakers should encourage clusters to shift from upstream to higher-value downstream activities, such as product design and customisation. In sectors like chemicals, collaborating with local universities and improving supply chains can drive growth. In the automotive sector, greater focus on R&D, design, and innovation is needed, supported by tax incentives and innovation hubs.
In the latest union budget, for 2025-26, the Government of India revised the classification criteria. The investment and turnover limits for MSME classification have been increased by 2.5 times and 2 times, respectively, to help businesses scale, improve efficiency, adopt technology, and generate more employment.
Further, the budget enhanced the credit availability for MSMEs by increasing the credit guarantee cover for micro and small enterprises from Rs.5 crore to Rs.10 crore, with additional support for startups and exporters. A new Fund of Funds with Rs. 10,000 crore will be established to provide term loans to first-time entrepreneurs, including women and disadvantaged communities. The budget also allocates Rs. 23,168 crore to the Ministry of MSME, marking a significant increase in funding to strengthen the sector. These measures aim to improve financial access, stimulate growth, and foster innovation in MSMEs across various industries.
Addressing the challenges faced by MSMEs is not only vital for the sector’s growth but also an integral part of India’s broader efforts to achieve the Sustainable Development Goals (SDGs), particularly in promoting inclusive growth, decent work, and innovation.