INDIA’S MSME SECTOR: GROWTH, KEY CHALLENGES AND THE EVOLVING REGULATORY LANDSCAPE
Sectoral Update | Jehani Legal
1. Overview
Micro, Small and Medium Enterprises (MSMEs) play a significant role in India’s economic growth, manufacturing activity, exports and employment generation. Alongside the sector’s expansion, access to finance, delayed payments, compliance requirements, skill shortages and infrastructure constraints continue to affect business operations and scalability.
This update outlines the sector’s growth, principal business challenges and key government initiatives aimed at improving the ease of doing business.
2. Growth and Economic Contribution
MSME registrations increased from 1.65 crore in 2023 to 9.94 crore in 2026, representing a reported six-fold rise.
The sector’s reported contribution to the Indian economy includes:
- 31% of India’s GDP;
- 49% of India’s exports;
- 35% of manufacturing;
- 33 crore people employed in the MSME sector.
The distribution of enterprises across MSME categories is as follows:
- Micro enterprises: 97%
- Small enterprises: 2.7%
- Medium enterprises: 0.3%
These figures highlight the predominance of micro enterprises within the MSME ecosystem.
3. Key Challenges Affecting MSME Growth
Despite its economic significance, the sector faces several constraints that can limit access to capital, operational efficiency and business expansion.
Access to Finance and Credit: Nearly 60% of small businesses are reported to remain outside the formal financial system, owing to lenders’ risk concerns, inadequate collateral and documentation requirements. Micro and small enterprises are particularly affected.
Delayed Payments: Delays in payments from large businesses and public sector entities place considerable pressure on MSME liquidity. An estimated ₹8.1 lakh crore remains locked in unpaid dues, disproportionately affecting micro and small enterprises.
Regulatory Compliance Burden: Compliance obligations and procedural requirements can increase the administrative burden on businesses, potentially discouraging formalisation and expansion. This challenge affects enterprises across all MSME categories.
Shortage of Skilled Workers: Gaps in technical, managerial and digital skills can constrain productivity and the adoption of technology, particularly among small and medium enterprises.
Competitive Pressures: Intense competition, narrow profit margins and limited product differentiation can restrict growth, especially for small and medium enterprises.
High Operating Costs: Expenditure on energy, logistics and other inputs can place pressure on profit margins, particularly for micro and small enterprises.
Inadequate Infrastructure: Limitations in reliable power supply, transportation, internet connectivity and industrial facilities can affect operational efficiency, particularly for micro enterprises in rural and semi-rural areas.
4. Government Initiatives to Improve the Ease of Doing Business
Several government initiatives aim to simplify approvals, reduce compliance requirements and strengthen the business environment.
Streamlining Approvals: The National Single Window System (NSWS), PARIVESH 3.0 and e-GramSwaraj are identified as platforms supporting administrative processes and access to government services.
State-Level Reforms: Measures include simplified land-use norms in certain states, third-party inspection or approval mechanisms, and legislation modelled on the Jan Vishwas framework.
Decriminalisation and Trust-Based Governance: The Jan Vishwas Act and Bill, together with initiatives by the Task Force on compliance reduction and deregulation, reflect efforts to simplify the regulatory environment.
Business Reforms Action Plan (BRAP) 2026: The initiative focuses on deepening business reforms, while the District Business Reforms Action Plan seeks to strengthen local entrepreneurship.
Reduction of Compliance Requirements: More than 47,000 compliance requirements were reportedly reduced nationwide over the five years preceding November 2025.
5. Concluding Observations
The continued expansion of the MSME sector underscores its importance to India’s economic growth, manufacturing, exports and employment. However, addressing persistent challenges relating to access to finance, delayed payments, regulatory compliance, skilled manpower and infrastructure remains essential to enabling sustainable growth. Effective implementation of government-led reforms, alongside a more streamlined and business-friendly regulatory environment, will be critical to strengthening MSME competitiveness and supporting long-term enterprise development.