What Is MSME? Role, Importance, and Impact on the Indian Economy

Learn about MSMEs in India—its classification, economic role, challenges, government schemes, and growth opportunities.
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2 min read
29 August 2025

If you plan to set up your enterprise in India, you need to know everything about MSME (micro, small, and medium enterprises).

MSMEs are micro, small, and medium enterprises that engage in the service sector or the manufacturing, processing, production, and preservation of goods. MSMEs contribute significantly to India’s total GDP, and the government’s objective is to raise this contribution to 50% in the coming years. That is why MSMEs are considered to be the backbone of the economy. They are also pivotal to the nation’s growth as they employ lakh of unskilled and semi-skilled individuals.

Once you have understood everything about MSMEs and their impact on the economy, you can identify an area of demand in the market and carve a niche for your enterprise.

Here are answers to some frequently asked questions about MSMEs:

What is the MSME sector and how are enterprises classified?

The MSME sector comprises micro, small, and medium enterprises that are classified according to certain parameters.

Before 2018, MSMEs were categorised based on the amount invested. After a change in regulations, they are classified based on their annual turnover, whether they operate in the manufacturing or service sector. The new conditions are as follows.

  • Micro enterprise: When annual turnover is up to Rs. 5 crore.
  • Small enterprise: When annual turnover is above Rs. 5 crore and less than Rs. 75 crore.
  • Medium enterprise: When annual turnover is above Rs. 75 crore and less than Rs. 250 crore.
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Historical trends in MSME contribution to the Indian economy

Before the Pandemic (2019):
In 2019, Micro, Small, and Medium Enterprises (MSMEs) made up 30.27% of India’s GDP. This growth happened due to government initiatives like:

  • Make in India: Encouraged local manufacturing and supported new businesses.
  • Startup India: Helped small startups grow and bring in new ideas.

These schemes brought more small businesses into the formal economy and helped them produce more for the country.

During the Pandemic (2020–2021):
The pandemic affected many industries and reduced the MSME share of GDP to 29% in 2021.
Key problems included:

  • Disruptions in supply chains.
  • Factories and service companies struggled to find workers.
  • People had less money to spend, so businesses produced less.

Recovery After the Pandemic (2022 onwards):
MSMEs began to recover in early 2022. Manufacturing and exports started to grow again.
About half of MSMEs began using digital tools to improve their operations and become more efficient.

Future Growth (By 2025):
Experts believe MSMEs could contribute 35% to India’s GDP by 2025, if they receive:

  • Better access to loans.
  • Improved infrastructure.
  • Employee training and skill development.

Key Takeaways:

  • MSMEs play a key role in India’s economic growth.
  • They are flexible and skilled, helping the country recover from tough times.
  • MSMEs continue to move toward big national goals and are essential for India's future development.

Importance of MSME in the Economic Development of India

The importance of MSMEs (Micro, Small, and Medium Enterprises) in India's economic development includes:

  • Employment generation by providing jobs to millions across urban and rural areas.
  • Promoting entrepreneurship by fostering innovation and encouraging self-reliance and business ownership.
  • Contributing significantly to India's GDP, enhancing economic growth.
  • Boosting exports by producing diverse goods and services, improving India's global trade position.
  • Supporting balanced regional development by promoting industrialisation in less developed areas.
  • Encouraging inclusive growth by offering economic opportunities to various socio-economic segments.

How do MSMEs contribute to the Indian economy?

MSMEs contribute around 29–30% to India’s GDP, showing how important they are to the country’s economy.

This means nearly one-third of the nation’s total output comes from small and medium businesses. Whether it’s in manufacturing, services, trade, or innovation, MSMEs play a big role—often matching or even doing better than some of the biggest industries.

This shows that MSMEs are not just supporting the economy from the side—they are a core part of India’s economic strength.

What are the benefits of MSME?

MSMEs have a lower capital-output ratio, meaning that even a small investment offers a good growth rate. They manufacture thousands of products, which means that you have plenty of options as a budding entrepreneur. Another by-product of the vast footprint of the sector is that it creates ample job opportunities in both urban and rural parts of the country.

Additional read: What are the benefits of an MSME loan?

Challenges faced by MSMEs in contributing to Indian economy

Even though MSMEs are a key part of India’s economy, they face many problems that stop them from reaching their full potential.

Main Challenges:

1. Lack of Access to Credit:
Most MSMEs find it hard to get loans from banks and other formal sources. Around 70% still depend on informal financing.
Banks often have slow and complicated loan approval processes, which discourages MSMEs from applying—even when they meet the requirements.

2. Poor Infrastructure:
In rural and semi-urban areas, problems like unreliable electricity and bad roads increase business costs and lower efficiency.
Limited access to modern facilities makes it harder for MSMEs to grow their manufacturing and service operations.

3. Complicated Regulations:
MSMEs struggle with complex rules related to tax, labour laws, and the environment.
Following these rules takes a lot of time and money, leaving fewer resources for the actual business.

4. Technology Gap:
Many MSMEs do not use modern tools or digital technology, which leads to lower productivity and makes it harder to compete.
Only about 30% of MSMEs have adopted digital solutions, according to a recent survey.

5. Impact of COVID-19:
The pandemic made things worse:

  • Over 25% of MSMEs had to shut down operations temporarily.
  • Supply chains were disrupted.
  • Labour shortages and weak demand reduced business output.

Government schemes available for MSMEs

Considering the role of this sector in the Indian economy, the central government, along with the RBI, has launched schemes to help the MSME entrepreneurs. A few notable initiatives are:

With the help of these schemes, you too can grow your business in this sector and contribute to India’s economic development.

If you are looking to access a higher amount of funds, you can consider the Bajaj Finance MSME Loan to boost revenue and streamline operations. Whether you are looking to set up or expand your SME. This collateral-free loan of up to Rs. 80 lakh at a competitive interest rate is the perfect fit for your small or medium-sized entity.

Opportunities and financial support for MSMEs in India

MSMEs, or micro, small, and medium enterprises, are vital for the economic growth and development of India. They provide employment opportunities, contribute to manufacturing and exports, and support innovation and entrepreneurship. Here are some of the opportunities in MSMEs:

  • Export promotion and potential for Indian products
  • Access funding – finance and subsidies
  • Government’s promotion and support
  • Cater to rising demand in the domestic market.
  • Less capital required
  • Workforce training

To address your cash flow concerns, you can avail the Flexi-loan facility, which allows you to pay interest only on what you withdraw from your total sanction. Further, you can pay interest-only EMIs throughout the tenure and repay the principal only at the end. This method helps reduce your EMIs by up to 45%, allowing for more effective and efficient working capital management.

Check your pre-approved offer and enjoy a hassle-free MSME loan application and approval process to get started today.

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Frequently asked questions

Who is eligible under MSME?

Any business entity involved in manufacturing, production, processing, or preservation of goods or providing services can qualify as an MSME in India. The eligibility is based on the enterprise’s investment in plant and machinery or equipment and its annual turnover. These criteria determine whether a business falls under micro, small, or medium categories.

What is the function of MSME in India?

MSMEs play a vital role in India's economy by promoting industrialisation in rural and less developed areas, generating employment, fostering innovation, and enhancing the production of goods and services. They also contribute significantly to exports, economic growth, and inclusive development, ensuring a more equitable distribution of wealth and resources across the country.

How much do MSMEs contribute to the GDP of India?

MSMEs contribute around 30% to India's GDP. This sector is crucial for economic growth as it supports various industries and services, creates jobs, and encourages entrepreneurial initiatives. By driving significant export volumes and fostering regional development, MSMEs are a cornerstone of India's economic strategy and inclusive growth.

What is the impact of SMEs in India?

SMEs in India have a significant impact by driving economic growth, fostering innovation, and creating employment. They contribute to exports, regional development, and the diversification of the economy. SMEs also play a crucial role in social development by enabling economic opportunities for various sections of society, particularly in rural and semi-urban areas.

Is GST registration mandatory for MSME?

GST registration is mandatory for MSMEs if their annual turnover exceeds the threshold limit set by the government, which is currently Rs. 40 lakhs for goods and Rs. 20 lakhs for services. However, MSMEs below this threshold can voluntarily register for GST to avail of input tax credits and expand their market reach.

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