THE GREAT MSME DISCONNECT
An Approach Paper with Diagnostics and Remedy
By Sanjay Chandra
Business Clinic
Introduction
Micro industries form nearly 95% of the MSME population in India and account for 35% of the total MSME revenue. They are a major contributor to the Indian economy based on their numbers and revenue generation power.
MSME Spectrum
| Category | Investment Limit (INR) (Plant Machine/Eqpt) | Turnover Limit (INR) |
|---|---|---|
| Micro Enterprise | Upto 2.5Cr | Upto 10Cr |
| Small Enterprise | Upto 25Cr | Upto 100Cr |
| Medium Enterprise | Upto 125Cr | Upto 500Cr |
| Category | Approx Share | Economic Contribution |
|---|---|---|
| Micro Enterprise | ~95–96% of all MSME | Rural employment, small-scale production |
| Small Enterprise | ~3–4% | Bridge between micro and medium, contributes to domestic supply chains |
| Medium Enterprise | <1% | Higher productivity, export-oriented, structured operations |
| Category | Contribution |
|---|---|
| Micro Enterprise | Small turnover per unit, but collectively form the backbone of MSMEs. |
| Small Enterprise | Larger turnover, often supplying to bigger industries. |
| Medium Enterprise | Highest turnover per unit, significant in exports and industrial clusters. |
MSMEs Contribution
Micro enterprises dominate in numbers, but medium enterprises dominate in revenue per unit. India with its large population and limited job availability index should have primary focus on micro industries. This would result in an increase in employment opportunities, encourage entrepreneurial initiatives, bring a positive impact and a feel good factor to the large segment of educated and skilled manpower which remains unemployed in India. Let us shift focus from prospective unicorns to hard working turtles.
Despite the appreciable commercial and social impact that the Micro segment has on the growth of the economy, due emphasis and support by government agencies is missing.
Decoding The Micro Struggle
The Government looks at the micro, small and medium enterprises as a single block and all policies and schemes are aligned accordingly. This is the biggest fallacy which is known to all concerned but addressed by none. The MSME platform is dominated by the small and medium companies on account of their branding, financial strength and political clout while the micro enterprises remain bereft of most of the advantages that accrue to the MSME sector.
The Government policy which defines the categorisation of the micro, small and medium enterprises is based on the value of plant and machinery (assets/investment) and the annual turnover. This is based on numbers alone. It does not capture the true nature of differentiation. The micro industries stand alone with respect to the following:
• Owner Driven
Majority are owner driven family enterprises which have multiple decision makers and the control and decision making power structure is not defined and spread over the leadership, often with overlapping boundaries. They do not have a defined mission and vision; they do not have smart objectives and targets; they do not have standing operating procedures, financial plan, quality plan etc. All actions are adhoc and taken by a leadership which is not capable to lead. They always remain in the struggle mode and never reach the growth stage.
• Numerical Strength
It is less than 50.
• Civil Infrastructure
Mostly rented. If company/proprietor owned then old and not well maintained.
• Plant & Machinery
2nd or 3rd generation vintage. Local tools which are mostly not calibrated.
• Calibre of Personnel
Medium to Low. The entire expertise revolves around a few good and dedicated employees who have a wealth of experience in their respective fields. They may not possess formal degrees or certifications but are masters of their trade. They are good but they also know that they are irreplaceable. This is not desirable for discipline, business continuity and process implementation.
• Resistance to Change
Being owner driven lends them inherently resistant to change. Most of the owners are family based businessmen who are moderately educated with limited exposure. To them everything is a risk. They are devoid of entrepreneurial ambitions and prefer the continuity and sustenance even if it is disadvantageous to them. They want to improve the existing than to explore the new.
Known Common Challenges
In addition to structural differentiation, seven core functional bottlenecks impede micro enterprise viability:
Access to Finance
- Many micro enterprises lack collateral or proper documentation, making it hard to secure loans.
- Dependence on informal lenders at high interest rates reduces profitability.
- Government schemes like MUDRA and CGTMSE exist, but disbursement is uneven.
Technological Backwardness
- Reliance on outdated machinery and production methods.
- Limited funds prevent investment in modern equipment.
- Results in low-quality goods and higher production costs.
Infrastructure Deficit
- Frequent power outages, poor road connectivity, and weak logistics.
- Increases delivery delays and costs, reducing competitiveness.
- Lack of industrial clusters prevents resource pooling and collaboration.
Regulatory Burden
- Complex compliance with GST, labour laws, and environmental clearances.
- Small entrepreneurs often face penalties due to lack of awareness.
Marketing & Distribution Issues
- Limited resources for branding and advertising.
- Dependence on middlemen who exploit margins.
- Weak distribution networks restrict market reach.
Skilled Labor Shortage
- While labour is abundant, skilled manpower is scarce. Most of the times when it is available it is unaffordable.
- Micro industries cannot afford training or retention programs.
- Potential employees prefer to join larger companies/companies with greater visibility at lower compensation and more demanding work environment in preference to micro companies.
Payment Delays & Cash Flow Problems
- Large buyers often delay payments, creating liquidity crises.
- Cash flow issues hinder reinvestment and daily operations.
Path Forward: At Enterprise Level
Micro industries in India need to adopt a structured, step-by-step approach. Here’s a practical guide that translates those challenges into actionable measures.
“For gaining from the measures outlined below the micro industry ownership must engage a professional and well reputed advisor/consultant who holds their hand during the actionable phase and ensures that the end result is achieved before disengaging. Attempts to try and do things on its own or through informal engagement through friends, business colleagues or relatives have not been found to be successful.”
Strengthen Financial Access
Improve liquidity and reduce dependence on informal lenders.
- Build relationships with local banks and cooperative societies.
- Maintain proper documentation and financial records.
- Explore government schemes like MUDRA and CGTMSE for collateral-free loans.
Upgrade Technology
Modernize production to improve quality and reduce costs.
- Invest gradually in calibrated tools and modern machinery.
- Leverage shared industrial clusters for equipment access.
- Adopt affordable digital tools for accounting and inventory.
Improve Infrastructure Usage
Mitigate infrastructure deficits through collaboration.
- Join or form local industrial clusters.
- Pool resources for logistics and warehousing.
- Use renewable energy solutions to reduce power outage risks.
Simplify Compliance
Reduce penalties and regulatory burden.
- Attend government awareness workshops on GST and labour laws.
- Use digital compliance platforms for filings.
- Seek professional help for complex clearances.
Strengthen Marketing & Distribution
Expand market reach and reduce dependence on middlemen.
- Build direct-to-consumer channels via e-commerce.
- Collaborate with other micro enterprises for joint branding.
- Participate in trade fairs and exhibitions.
Develop Skilled Workforce
Address shortage of affordable skilled manpower.
- Partner with vocational institutes for training; Offer apprenticeships to local youth.
- Create incentive-based retention programs.
Manage Cash Flow Effectively
Reduce liquidity crises caused by delayed payments.
- Negotiate clear payment terms with buyers.
- Use invoice discounting or factoring services.
- Maintain emergency reserves for daily operations.
Path Forward: At Government Level
A focussed and repetitive campaign by the government needs to be undertaken to educate the existing leadership of micro enterprises to step out of their comfort zones and start new initiatives. This is only practical if the government guarantees the status quo even when the initiatives fail. The government will have to hold the hand of these enterprises and act as their partners rather than regulators, monitors and benefactors. Small starts can be made with pilot programmes and the ones which prove to be successful can be scaled and diversified.
Policy Changes For Long Term Vision
The micro segment primarily revolves around low end technology based business. It has very basic infrastructure and limited skilled manpower. Their requirements are simple: They need work, they need funds and skilled manpower to execute the work.
- Mandatory Sub-Contracting Quota: To meet these needs the government should bring in policy that for all government contracts awarded to large companies beyond a certain value, an appreciable percentage of the same would be sub-contracted to the micro segment. Similar to the offset clause in the Defence Acquisition Procedure (DAP).
- Minimum Price Floor Guarantee: This sub-contracted work would be mandated at a guaranteed minimum price akin to the Minimum Support Price (MSP) in the agricultural sector, safeguarding margins against predatory buyer pricing.
Conclusion
Reforms for micro industries in India are currently focused on expanding credit access, digitalising compliance, and strengthening microfinance guardrails. The Union Budget 2025–26 raised credit guarantee limits, introduced customised credit cards for micro enterprises, and promoted digitalisation to reduce bureaucratic hurdles. These measures aim to ease liquidity constraints and improve competitiveness.
Sanjay Chandra
Lead Advisor · Business Clinic
Business Clinic delivers action-oriented diagnostics and operational problem solving for Indian MSMEs, Tier-1 industrial vendors, and global manufacturers establishing on-ground footprints.