MSMEs need discipline, not doles

India’s economic rise is often narrated through the lens of its big industries, IT services, or booming start-up ecosystem. But the less glamorous truth is that micro, small and medium enterprises (MSMEs) have carried the weight of this transformation with remarkable resilience. From an agrarian economy at Independence, with GDP at barely Rs 2.7 lakh crore, India has leapt to a $4.3 trillion powerhouse—the world’s fourth-largest economy. This journey could not have been possible without the steady, often uncelebrated, contribution of MSMEs.

The numbers speak for themselves. MSMEs contribute about 33% to India’s GDP and nearly 40% of its exports. They employ over 11 crore people across 633 lakh units, with more than half of these based in rural India. That rural component is not incidental—it is central. MSMEs are the connective tissue between India’s villages and its global markets, enabling livelihoods while powering exports. Their role in building the country’s foreign exchange reserves—up from $1.8 billion at Independence to $573 billion today—is important. In short, if the Indian economy is the body, MSMEs are both its backbone and its bloodstream. 

Structural Weakness

Yet this powerhouse sector is hobbled by chronic structural weaknesses. Chief among them is finance. The overall demand for credit in the MSME sector is estimated at Rs 69.3 trillion, with debt forming nearly 80% of that requirement. Of this, Rs 25 trillion remains unmet—the infamous “credit gap.” The problem is not lack of demand but lack of access.

An astonishing 93% of MSMEs have no access to institutional credit. They rely instead on friends, family, chit funds, or moneylenders—sources that may offer speed but at punitive rates and without the benefits of formal recognition. The reasons are familiar: high collateral requirements, cumbersome documentation, and lack of financial literacy. Many micro units, which make up the overwhelming majority of MSMEs, are proprietorships with informal systems and little incentive to maintain accounts that could withstand scrutiny.

Government schemes exist, but uptake is limited. The Udyam registration portal, launched in 2020 to streamline benefits, has only managed to register about 27% of MSMEs. For the rest, disclosure of financial details, employee strength, or operations seems more a risk than an opportunity. In effect, the state knows little about the vast majority of MSMEs, making policy intervention a guessing game.

Paradigm Shift from Subsidies to Incentives

For years, policy support has been designed around subsidies, concessional loans, and credit guarantees. Post- COVID-19, this approach intensified, with emergency lines of credit rolled out to keep small businesses afloat. While such measures were necessary, they are far from sufficient. Subsidies and guarantees can plug short-term professionalism. This is where the debate must shift. If the goal is to make MSMEs globally competitive, access to finance cannot remain a function of government largesse. It must be tied to transparency, accountability, and structured credit discipline. That requires not just money, but mechanisms.

Credit Rating Gap

One such mechanism once existed—the Performance Credit Rating Scheme, launched in 2004 and monitored by NSIC. It provided third-party, independent evaluations of MSMEs’ financial and operational health. Far from being a box-ticking exercise, it had tangible benefits. Rated firms accessed higher credit at lower interest rates. They improved record-keeping, gained operational efficiency, and strengthened organizational systems. Nearly half of those rated expanded into exports. Independent evaluations of the scheme confirmed its effectiveness. Yet in 2018, it was discontinued. Since
then, MSMEs have had to navigate a financial landscape without a structured rating system that could bridge the trust deficit between lenders and borrowers. The result: a widening credit gap, perpetuated dependence on informal borrowing, and missed opportunities for growth. Reviving and modernizing such a rating framework is not just desirable—it is urgent. A credible credit rating
system, integrated with access to cheaper institutional finance, would push MSMEs to maintain proper books, adopt transparent practices, and professionalize operations. In return, it would give them bargaining power, lower borrowing costs, and entry into formal financial networks.

Handholding, Not Handouts

The real question then is: how should the state and financial institutions engage with MSMEs? The answer lies in handholding, not handouts. Instead of merely offering subsidies or debt waivers, policy must invest incbuilding financial literacy, simplifying compliance, and incentivizing formalization. Training entrepreneurs in bookkeeping, digital payments, and documentation may not sound glamorous, but it is precisely this scaffolding that can turn micro units into sustainable businesses. Equally, lenders must rethink their approach. Risk assessment cannot remain collateral-driven when most
micro units lack tangible assets to mortgage. Alternative credit scoring models—based on cash flows, digital transactions, and supply chain linkages—can widen the base of bankable enterprises. Combining such innovation with a revived rating system can help unlock formal finance for millions of MSMEs currently locked out.

Why It Matters

The stakes are high. India has set itself a target of $1 trillion in exports from MSMEs in the coming years. Without addressing the financing bottleneck, this ambition will remain aspirational. More broadly, MSMEs are not just economic units; they are social stabilizers. They provide employment in regions where large industries will never reach. They anchor rural economies and stem migration pressures on cities. Their success or failure has a direct bearing on India’s quest for inclusive, broad-based growth.

A New Contract

For too long, MSMEs have been romanticised as the “backbone of the economy.” That phrase, while true, has become a policy crutch—justifying subsidies while avoiding deeper reform. The real task is to strengthen that backbone through accountability and empowerment. The state must build systems that reward transparency and
discipline. Financial institutions must adapt to the realities of micro-enterprises. And entrepreneurs themselves must recognize that professionalism and proper documentation are not bureaucratic hurdles, but gateways to growth.

India’s MSMEs built the foundation of the economy once before, when they were known as small-scale industries. They can do it again, but only if we stop treating them as beneficiaries and start treating them as partners.

The path forward is clear: less romance, more rigor; fewer handouts, more handholding; and a renewed emphasis on credit discipline. The business as usual approach or a more of the same approach is grossly inadequate to meet the challenge of change. New, innovative methods of financing, methods focussing on the cash flow system, credit guarantee, technological upgradation, venture capital financing, adequacy, timeliness and cost of credit, must be explored urgently to help MSMEs overcome the travails of transition. Only then will MSMEs not just survive, but truly power India’s next growth chapter.