MSMEs matter for jobs

India’s employment challenge is no longer about whether growth is taking place. It is about where that growth lands and how widely its benefits are shared. Over the past decade, output has expanded, public infrastructure has multiplied and corporate balance sheets have strengthened. Yet employment outcomes remain weak, uneven and insecure. The persistence of this gap points to a deeper structural issue. India’s micro, small and medium enterprises generate a large share of employment, but the policy ecosystem continues to privilege scale, consolidation and capital intensity.

This is not simply a matter of neglect. It reflects how economic success is defined, how reform is sequenced and which outcomes policymakers prioritise.

MSMEs employ far more people per unit of capital than large firms. They dominate labour intensive segments such as textiles, food processing, leather, construction services, retail, repair services and local manufacturing. These enterprises often absorb workers with modest formal education, rural migrants, first time job seekers and, in several sectors, women entering paid work. In an economy where the workforce expands by millions each year, this capacity to absorb labour is not incidental. It is the central employment engine.

At the same time, public discourse around competitiveness and growth remains centred on scale. Large plants, export champions, national supply chains and global manufacturing hubs dominate policy signalling. This orientation is understandable. Large firms are easier to measure, easier to regulate and easier to integrate into global value chains. Their output shows up clearly in GDP, their tax contributions are visible and their engagement with the state is concentrated and organised.

MSMEs, by contrast, are fragmented, geographically dispersed and often informal. Their employment contribution is substantial, but harder to aggregate. Their political voice is diffuse. The result is a policy architecture that speaks the language of inclusion while structurally favouring firms that scale quickly and invest heavily in capital.

Credit allocation illustrates this imbalance clearly. On paper, priority sector lending and targeted credit schemes are designed to support small enterprises. In practice, formal finance still flows more easily to larger firms with collateral, audited balance sheets and predictable cash flows. Small enterprises continue to rely on informal borrowing, delayed payments from buyers and short-term credit at higher cost. Government backed guarantee schemes reduce some risk for lenders, but often prioritise balance sheet protection over borrower flexibility. Access improves at the margin, but the underlying asymmetry remains.

Payment discipline compounds the problem. MSMEs frequently face long delays from large buyers, including public sector entities. While legal frameworks exist to address this, enforcement is weak and dispute resolution costly. For a small firm, delayed payment is not a minor inconvenience. It directly constrains working capital, limits hiring and raises the risk of closure.

Compliance costs represent another structural disadvantage. India has made genuine efforts to simplify procedures, particularly through digitisation. Yet the cumulative burden of registrations, filings, inspections and regulatory overlap still falls disproportionately on smaller firms. Large companies spread these costs across scale and specialised teams. For a micro or small enterprise, compliance often means the owner’s time, uncertainty and exposure to penalties for procedural lapses rather than substantive violations. Ease of doing business rankings rarely capture this lived experience.

Labour reform follows a similar pattern. Much of the recent reform agenda has focused on increasing flexibility for employers, particularly in hiring and retrenchment. This may improve efficiency for larger factories and formal firms. It does little, however, for the millions of micro enterprises that already operate informally to avoid regulatory thresholds. While labour codes articulate an intent to expand social security, implementation remains limited and uneven. Without credible, portable social protection, formality continues to look like a cost rather than a benefit for both firms and workers.

Industrial policy has also tilted decisively towards scale driven outcomes. Production linked incentive schemes, sectoral champions and export-oriented clusters aim to build global competitiveness. That objective is legitimate. The problem lies in the design. These schemes reward incremental output and investment, not employment intensity. Capital heavy sectors receive the strongest incentives, while labour intensive, MSME dominated sectors rely on fragmented support through skilling initiatives, credit lines and marketing assistance that rarely integrate into a coherent growth pathway.

This bias is reinforced by how economic performance is measured. GDP captures output, not employment quality. Large firms can lift headline growth even when they create relatively few jobs. MSMEs generate livelihoods, but their contribution is less visible in macro aggregates. When growth becomes the primary signal of success, policy naturally gravitates towards firms that move the growth needle fastest, not those that employ the most people.

There is also a cultural dimension. Scale carries prestige. Large factories, multinational investments and global brands symbolise modernity and ambition. Small enterprises are often framed as transitional, something to be upgraded, consolidated or absorbed rather than strengthened in their own right. This mindset overlooks a basic structural reality. In a labour abundant economy, scale and employment do not automatically align.

None of this suggests that India should turn away from scale or global competitiveness. Large firms matter for productivity, exports and technological upgrading. The problem is the assumption that scale alone will resolve the jobs challenge. Evidence increasingly suggests otherwise. Capital intensive growth can coexist with weak employment outcomes, particularly when technology substitutes labour faster than new sectors absorb it. 

A jobs first policy approach would look materially different.

Credit policy would shift from collateral heavy models towards cash flow-based lending, faster invoice settlement and genuine risk sharing that lowers borrowing costs for small firms. Payment discipline, especially by public sector buyers, would be enforced as a matter of credibility, not convenience.

Compliance would be redesigned around proportionality and trust. Fewer thresholds that incentivise firms to remain artificially small, simpler filings and predictable inspections would reduce the informalisation bias built into the system. Labour policy would prioritise universal, portable social protection. When benefits travel with workers, formality becomes attractive rather than punitive. This would encourage small firms to grow without fear of crossing regulatory cliffs.

Industrial policy would explicitly reward employment alongside output. Incentive schemes could be calibrated to encourage supplier networks, decentralised production and upgrading within MSME clusters rather than only large-scale plants. Public procurement could be leveraged more systematically to provide stable demand for small enterprises, with transparent rules and timely payments.

Most importantly, success metrics would change. Job creation, wage growth and employment stability would be tracked with the same seriousness as investment and exports. Without this shift, policy will continue to privilege what is visible over what is vital. India’s employment challenge is not mysterious. The country already has an engine that creates jobs. It is dispersed, informal and often undervalued, but it exists. The real question is whether policy is willing to engage with that engine on its own terms rather than forcing it to conform to a scale centric ideal.

The writer is a policy analyst focusing on employment, demographics, and economic development.