Enhancing Competitiveness of MSMEs in India

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Enhancing MSMEs Competitiveness in India Disclaimer
Authors
This report was prepared by the Institute for Competitiveness for NITI Aayog. The Institute for Competitiveness did
not receive financial assistance under the NITI Aayog research scheme to prepare it. The NITI Aayog logo indicates
collaboration and acknowledgement of the work’s relevance for the MSME policy domain. However, NITI Aayog does
not endorse or assume responsibility for the report’s findings and conclusions. All data cited, including that from
verified Government sources such as the PLFS and the UDYAM Portal, have been interpreted solely by the Institute for
Competitiveness. While due care has been exercised to ensure the accuracy of the analysis and arguments supported
by existing literature, the possibility of alternate interpretations, especially as the MSME database evolves, cannot be
ruled out.
Amit Kapoor
Honorary Chairman,
Institute for Competitiveness
Sheen Zutshi
Research Manager,
Institute for Competitiveness
Mukul Anand
Researcher,
Institute for Competitiveness Competitiveness
in India
Enhancing MSMEs 5
MESSAGE MESSAGE 9
MESSAGE 11
MESSAGEMESSAGE AMIT KAPOOR
Honorary Chairman,
Institute for Competitiveness
MSMEs form the backbone of India’s economic landscape and serve as the cradle of entrepreneurship. They
encompass a diverse spectrum- from traditional artisans and craftspersons with legacies spanning decades to cutting-
edge defence and advanced engineering enterprises. These businesses preserve the nation’s rich heritage and lay the
groundwork for a dynamic future. To bridge this rich legacy with the challenges of the present, it is essential to delve
into the factors shaping MSME competitiveness and identify pathways to overcome these barriers for sustained growth
and innovation.
The central tenet of this study is to unravel the complexities of MSME competitiveness. MSMEs face challenges
that, if addressed, can unlock significant growth. High-risk perception and costs limit formal lending to MSMEs.
Inadequate finance hinders R&D investment and upgrades. Many SMEs lack access to global technology and struggle
with domestic innovations due to limited resources and high costs. MSMEs struggle to access capacity-building
opportunities due to financial illiteracy, skill gaps, and lack of awareness of government initiatives. Most MSMEs operate
informally, restricting their access to finance and global markets. They face difficulties in branding and understanding
market trends, which limits expansion, leaving them vulnerable to market fluctuations due to weak branding and limited
product variety.
Focusing on MSMEs in five key sectors- automotive, textile manufacturing, chemical, pharmaceutical, and food
processing this study employs a cluster-based approach to analyse the performance of MSMEs in India. By integrating
firm-level data from CMIE’s Prowess database with labour force data from the PLFS and utilising Porter’s Diamond
model alongside NIC codes, the research offers a comprehensive view of MSMEs’ economic structure, cluster
distribution in India, and regional strengths. This analysis is enriched by an evaluation of the MSME policy framework at
both national and state levels, assessing its effectiveness and regional coordination to better understand the collective
impact of these policies. This combined approach bridges gaps in existing literature, providing actionable insights for
designing targeted cluster programs and policies to foster MSME growth, innovation, and sustainability.
I extend my heartfelt gratitude to Shri Ishtiyaque Ahmed, Senior Adviser (Industry & Foreign Investment), and his
team at Vertical Industry/MSME at NITI Aayog for their support throughout the preparation of this report. I also
thank Shri Suman Bery, Vice Chairperson of NITI Aayog, and Shri B. V. R. Subrahmanyam, CEO of NITI Aayog, for
their encouragement, which has been instrumental in shaping the focus of this study. Finally, I would also like to
acknowledge the entire Research Team at the Institute for Competitiveness (IFC) for their critical input and tireless
efforts, which have helped immensely to give this report its present shape. This report, in its current form, is a
testament to the commitment and collaborative efforts of everyone involved, ensuring its relevance and meaningful
impact for all stakeholders.
MESSAGE The author is grateful to Shri Suman K. Bery, Vice Chairman, NITI Aayog, Dr VK Saraswat, Member, NITI Aayog and Shri
B.V.R. Subrahmanyam, CEO, NITI Aayog, for their unwavering support throughout the preparation of the report. Their
guidance and encouragement were invaluable throughout the entire process. The role of leadership was instrumental
in facilitating the development of this report.
Furthermore, the author extends heartfelt gratitude to Shri Ishtiyaque Ahmed, Program Director, Industry and Foreign
Investment Division, and his team for their support throughout the report’s preparation. His steadfast support and
incisive feedback were pivotal in shaping the report’s direction and depth.
Finally, the author would also like to acknowledge the entire research team at the Institute for Competitiveness for
their critical input and tireless efforts, which have helped immensely to give this report its present shape. This report,
in every form, results from the commitment and collaborative efforts of everyone involved, ensuring its relevance and
meaningful impact for all stakeholders.
Acknowledgements
AMIT KAPOOR
Honorary Chairman,
Institute for Competitiveness 16
Executive
Summary 17
This report is structured into four key chapters, each designed
to deepen our understanding of India’s Micro, Small and
Medium Enterprises ( MSMEs) competitiveness.
T
he exploration begins by examining the challenges faced by Micro, Small, and Medium Enterprises (MSMEs) and
progresses toward a detailed analysis of competitive frameworks, cluster dynamics, and policy effectiveness. Each
chapter builds upon the previous one, culminating in robust recommendations for strengthening MSME competitiveness.
The opening chapter “Understanding MSMEs Challenges for Enhancing Competitiveness” delves into the array
of challenges confronting MSMEs—ranging from financial constraints and technological gaps to skill shortages and
regulatory hurdles. By thoroughly examining these barriers, the chapter lays a foundation for identifying key areas that
require strategic intervention. Overcoming these challenges is pivotal for creating an environment where MSMEs can
thrive and compete effectively.
Building on the insights from the first chapter, the second chapter “Competitiveness Framework – MSMEs and the
Path to Prosperity ” introduces a competitiveness framework rooted in cluster theory. This framework charts a path
to prosperity by emphasizing the role of collaborative ecosystems, where enterprises, suppliers, and institutions work
in synergy. By leveraging these clusters, MSMEs can enhance efficiency, spur innovation, and respond more adeptly to
market demands, thus gaining a competitive edge.
The third chapter “Understanding MSMEs Competitiveness in India Using Clusters Approach”. The cluster approach
is employed to comprehensively understand the performance and dynamics of Small and Medium Enterprises (SMEs)
within the Indian economy. Periodic Labour Force Survey (PLFS) data indicates that 74.3 percent of workers engaged
in proprietary and partnership enterprises are involved in the non-agriculture sector. This information is instrumental in
comprehending the nature of employment within these enterprises and highlights the significance of activities in informal
sector. Understanding SMEs’ performance from PLFS data allows for a more nuanced analysis of their contribution,
employment patterns, and overall impact on the informal sector. This, in addition to UDYAM registration portal, can
contribute to filling the gaps in understanding the MSMEs. The UDYAM portal data reveals that a significant proportion,
specifically 81 per cent, of MSMEs operate as proprietorships, with 80 per cent falling into the Microenterprise category.
Recognising the prevalence of such ownership structures, it becomes crucial to analyse and assess the performance
of these enterprises collectively, which the cluster approach
facilitates.
The final chapter is the review of the policy landscape governing
MSMEs at national and state level, evaluating the effectiveness of
current measures aimed at bolstering competitiveness. It reveals
that despite numerous policies, gaps in awareness, stakeholder
engagement, and adaptability limit their impact. The chapter
concludes with recommendations for a more robust, adaptive
policy framework that responds to the evolving needs of MSMEs,
emphasizing continuous monitoring, feedback integration, and
data-driven adjustments. 18
Learnings and Recommendations
from National-Level Policies
Access to Finance
1.
»One of the foremost learnings at the national level pertains to the crucial role of the Credit Guarantee Fund Trust
for Micro and Small Enterprises (CGTMSE) in facilitating credit for MSMEs. However, the Trust currently operates
without the desired level of regulatory oversight, leading to challenges in balancing fund availability with the financial
discipline required for sustainable growth. Bringing the CGTMSE under a robust regulatory authority could help
mitigate these concerns.
»Another important measure is to use CGTMSE to promote women’s entrepreneurship. This could be done by
increasing the guaranteed coverage to 100% for businesses led by women founders. Additionally, reducing CGTMSE
premium rates can significantly increase its adoption by micro and small enterprises, which often struggle to afford
higher premiums. Transparency around premium rates is also essential, and banks should be required to disclose
these details on their websites or on the CGTMSE portal.
»Beyond strengthening CGTMSE, Non-Banking Financial Companies (NBFCs) have emerged as a vital source of credit
for MSMEs, especially micro-sized enterprises in remote areas. Their quicker lending decisions, niche specialization,
and faster services have contributed to NBFCs’ rapid growth in the MSME credit space. However, NBFCs’ borrowing
costs from banks are typically high due to collateral requirements and risk premiums, making it challenging for them
to offer competitive interest rates to MSMEs. This situation underlines the need for better on-lending structures
and the provision of lower-rate wholesale funding to NBFCs. The Standing Committee on Finance (17th Lok Sabha)
acknowledged this gap and suggested the Small Industries Development Bank of India (SIDBI) expand its balance
sheet to provide more extensive wholesale financing to NBFCs. While the Ministry of Finance has indicated that
SIDBI is well-capitalized for its projected growth, the Committee insists on further scaling SIDBI’s role to directly
invest in smaller NBFCs, thereby improving their governance, operational capacity, and access to affordable funds.
»Another recommendation involves reinstating earlier norms under Priority Sector Lending (PSL), allowing bank
loans extended to NBFCs for further lending to MSMEs to be classified as indirect finance to MSMEs. This would
incentivize banks to support NBFCs, especially when combined with credit insurance schemes by IRDAI that could
mitigate NBFCs’ risk perceptions and encourage the flow of credit to micro-enterprises. In combination, these
reforms aim to strengthen the credit ecosystem for MSMEs and promote financial inclusivity.
Addressing Skilling Challenges
Faced by MSMEs
2.
Skilling remains a cornerstone for MSME competitiveness and growth. Present data indicates that a significant percentage
of India’s workforce falls under Skill Level 1 (low-skilled) and Skill Level 2 (semi-skilled), with fewer workers at higher skill
levels. According to the Periodic Labour Force Survey (PLFS), the proportion of the workforce aged 15 to 59 lacking formal
vocational or technical training, while declining, still remains substantial. To bridge this skills gap, forging partnerships 19
Technological Development in
MSMEs
3.
Enhancing Supply Chains
The technological development of MSMEs is closely linked with robust supply chain integration. Improved supply chains
can help MSMEs harness global value chains (GVCs), boosting their exports and competitiveness. Although India’s
GVC participation has risen over the years, it remains below that of major economies and regional competitors. The
government can facilitate process innovation, reduce costs, and improve product management within MSME clusters
by prioritising efficient logistics, digital linkages, and smart trade infrastructure. Streamlining supply chains also brings
broader benefits, such as stabilizing food prices by reducing bottlenecks in essential commodities. In sectors like
textiles and food processing, targeted initiatives—ranging from building electronic linkage platforms to funding trade
fairs—can spur innovation and market access.
between government bodies, educational institutions, and industries can prove invaluable. These collaborations can
create new, dynamic curricula and training modules, including shorter, flexible programs, that meet the evolving
needs of MSMEs. To ensure training relevancy, boards or councils mandated with periodically reviewing and updating
occupational standards should be formed. Further, cost-sharing or grant-based models to subsidize the costs of
training and technology adoption for micro-enterprises can go a long way in encouraging widespread participation.
By identifying granular skill demands, states can better align training programs with industrial requirements, thus
boosting MSME productivity.
Artificial Intelligence (AI) holds immense potential for MSMEs, but adoption barriers remain high. Many MSMEs lack
familiarity with India’s data protection laws and are unaware of how to ensure data compliance when integrating AI.
Government-led awareness campaigns and simplified guidelines on data protection can encourage responsible AI use
and reduce the risk of non-compliance. A shortage of qualified AI professionals is another critical hurdle: many MSMEs
lack the in-house expertise to evaluate, select, and implement AI solutions. Collaborative platforms connecting MSMEs
with academic institutions, AI consultants, and larger tech companies can bridge this skills gap. Affordability is another
persistent challenge, especially with AI tools, as computing infrastructure and training costs remain prohibitive for
smaller enterprises. Targeted financial assistance—such as grants, subsidies, tax incentives, or low-interest loans—and
cloud-based, pay-as-you-go AI solutions can make advanced technologies more accessible. Such interventions would
align with the finding that most MSMEs want AI to be both affordable and equitably accessible.
Enhance Risk Management through Digital and Insurance Solutions
Integrating AI in MSMEs
MSMEs benefit greatly from affordable digital risk management solutions, particularly those in sectors with extended
supply chains like food processing. Real-time monitoring tools, such as sensor-based tracking, can reduce inventory
risks, optimize logistics, and limit damage during transit. Insurance combined with these digital tools adds another
layer of protection against operational shocks. Drawing on experiences from countries like Thailand and Malaysia,
where combining sensor-based tracking with insurance has proven successful, India could encourage a similar model
for its MSMEs. Collaborations between insurance providers and technology firms that offer training, awareness, and
affordable insurance packages could greatly enhance MSME resilience. 20
Increasing Institutes for
Collaboration (IFCs)
4.
Institutions for Collaboration (IFCs), as conceptualized by Porter and Emmons, include both formal and informal actors
that foster cluster development. These bodies support R&D, productivity enhancement, and process innovation, all
vital to MSMEs that typically struggle with limited resources. India’s Micro and Small Enterprises-Cluster Development
Programme (MSE-CDP) has instituted Common Facilitation Centres (CFCs). Still, there is a pressing need to elevate
them to align with the standards of robust IFCs.Strengthening existing or emerging IFCs could involve consolidating
membership, fostering knowledge networks among universities, private entities, and research institutes, and promoting
consistent information sharing. Such collaborative entities can accelerate product development, bridge skill gaps, and
ensure that MSMEs have better access to the latest technologies. Additionally, re-examining property rights frameworks
is important to build trust among stakeholders, so that proprietary information shared within IFCs remains protected.
The widespread adoption of state-level MSME policies has fostered a conducive environment for enterprise growth, yet
awareness and effective utilization remain limited. States should improve information dissemination through targeted
awareness campaigns, ensuring that MSMEs fully understand and access available schemes. Enhanced stakeholder
engagement during policy formulation, incorporating direct feedback from MSMEs and industry stakeholders, can
tailor support measures to actual needs, addressing critical gaps like inadequate financial and technical support. Not
all states have MSME specific policies, states which have those policies it is not updated. In access to finance, states
should reconsider existing interest subsidy schemes that often exclude micro-enterprises due to restrictive turnover
requirements. Alternative financing mechanisms—such as cash-flow-based lending, equity financing, factoring, and
venture capital—should be explored to meet the unique needs of smaller firms. Expanding structured insurance
frameworks beyond isolated examples can offer essential risk mitigation, enabling MSMEs to invest more confidently.
Market access for MSMEs can be improved by addressing capacity constraints in diversification and scaling. Expanding
export incentives to include smaller enterprises and investing in digital marketing and e-commerce training can bridge
skills and resource gaps. Partnerships with logistics providers and investments in infrastructure will facilitate seamless
supply chains, allowing MSMEs to penetrate broader domestic and global markets. States should design modular, short-
term, and flexible training programs to bolster skill development, particularly targeting rural micro-enterprises. Free or
highly subsidised online or on-site training can reduce opportunity costs and update workforce skills in line with industry
advancements.
Improving access to technology and infrastructure requires a tiered approach. States should focus on foundational
needs such as reliable power, co-working spaces, and shared machinery for micro-units while supporting advanced R&D
for medium and larger enterprises. Efforts to reduce infrastructure costs—through renewable energy solutions, shared
power facilities, and affordable industrial park rentals—will enhance operational stability. Finally, consistent monitoring,
Learnings from the State’s MSME
policies 21
Rethinking Clusters for MSME
Development
1.
India’s cluster policy dates back to 1987 and draws upon ideas of collective efficiency. However, it diverges from global
best practices from developed countries such as the United States and the European Union. These regions use cluster
mapping as a sophisticated tool for informing policy decisions and promoting cross-border collaborations.
There is a need for India to reimagine its cluster development approach; policymakers must redefine clusters . Clusters
are not just sectors – they capture the geographic footprint of economic activities, not because they belong to the
same statistical classification but because industries are systematically related through local spillovers and linkages. The
Indian definition of clusters aligns more closely with the concepts of Collective Efficiency (as proposed by Schmitz) and
certain elements of Flexible Specialization (according to Piore and Sabel) A well-structured cluster policy can unlock
synergies between SMEs, research institutions, universities, and Institutes for collaborations, forming robust ecosystems.
Personalized services to SMEs—such as diagnosing innovation capabilities, mapping out growth roadmaps, and bridging
technology gaps—can catalyze productivity gains. By fostering stronger ties between universities and industries, clusters
can facilitate knowledge transfer and accelerate the commercialization of research.
Learnings from Cluster-Level
Analysis
evaluation, and transparent communication would benefit policy formulation and implementation. Strengthening
stakeholder participation via MSME-specific forums, refining industrial statistics, and public sharing of policy evaluation
data will foster evidence-based decision-making and continuous improvement, ultimately creating a more resilient and
competitive MSME ecosystem at the state level.
Many textile clusters rely heavily on upstream activities like raw material processing.Policymakers can encourage a move
toward downstream activities that add higher value—such as designing finished garments or specialized fabric. This
pivot could involve partnering with design schools, modernizing capital equipment, and fostering digital supply chain
linkages, as highlighted by the Economic Survey 2024’s emphasis on upgrading weaving and processing segments.
Notable regions with strong textile specializations include Surat, Ludhiana, and Tiruppur, where reinforcing cluster
efficiency can foster economies of scale, streamline production, and improve branding for global markets.
Cluster-Specific Recommendations
2.
Textile Manufacturing
and Apparel 22
Enterprises in chemicals often face skilled labor shortages and complex regulatory requirements. Streamlining product
approvals, fostering compliance training, and enabling marketing support can reduce the cost burden on smaller firms.
Collaboration with local universities to expand the pool of researchers, engineers, and chemical experts can fill knowledge
gaps, while improved marketing and supply chain optimization can help MSMEs move downstream in the value chain.
Automotive MSMEs typically prioritize tangible assets over R&D and innovation. Encouraging a shift toward intangible
investments through tax incentives or grants could help firms develop more sophisticated offerings. Dependence on large
players for supply contracts often leaves smaller enterprises with limited bargaining power. By creating platforms that
offer direct market linkages and promoting cooperative frameworks in the value chain, MSMEs can enhance technical
skills and diversify their client bases. Regions like Gurgaon, Rewari, and Pune already exhibit cluster advantages, and
targeted policy support can strengthen their innovation ecosystems.
Chemical
Cluster
Automotive
Cluster
India’s food processing sector exhibits regional fragmentation, which undercuts its growth potential. Linking farmers
with processors is crucial, ensuring a seamless flow of raw materials and fostering value addition. Sensor-based tracking
systems combined with cargo insurance, as seen in Malaysia and Thailand, can reduce losses in transit. State-level
branding guidance for agricultural products, the creation of specialized food parks, and technology upgradation are also
crucial. Strengthening this cluster is particularly urgent in the country’s northeastern and eastern belts, which remain
underutilized despite their agricultural diversity.
Food Processing
Cluster 23 24
Table of
Contents Table of
Contents
Introduction
Chapter 1: Understanding
MSMEs Challenges for Enhancing
Competitiveness
Chapter 2: Competitiveness
Framework: MSMEs and the Path to
Prosperity
Chapter 3: Understanding MSMEs
competitiveness in India using Clusters
Cluster Level Analysis
Chapter 4: Policies for MSMEs in India
Learnings and Recommendations
Key Takeaways
Conclusion
Bibliography
24
34
58
64
76
90
111
112
114
50 26
Introduction 27
90%
50%
W
ithin the realm of global economics, micro-, small- and medium-sized enterprises
(MSMEs) emerge as the cornerstone of prosperity, embodying the largest and most
influential segment across all economies (Storey, Pinch, & Mason, 1991). They constitute
a vast majority of businesses worldwide and play a pivotal role in job creation and global
economic growth.
Despite being the largest business segment globally in terms of numbers, SMEs have
been found to participate less in Global Value chains (GVC) than the large enterprises.
(Chaisse & Rodríguez-Chiffelle, 2019)
Participation in Global Value Chains (GVC) refers to the extent to which a nation’s exports
are embedded within multi-stage international trade processes. This concept refers to
the integration of domestic value added into the exports of other nations, as well as the
incorporation of foreign value added into a nation’s exports. The proportion of a nation’s
total exports that is comprised of GVC participation provides a quantitative assessment of
the extent to which its export sector relies on GVCs. GVC metrics also play a crucial role in
assessing the extent to which sectors depend on international manufacturing networks.
(UNCTAD, 2013).
GVCs serve as critical facilitators of the international exchange
of investment, knowledge, and managerial practices that are
in line with global standards, thereby significantly bolstering
domestic businesses
They make up about
of businesses
globally and are
responsible for over
of the total global employment. 28
GVCs are crucial for engaging with the global market, by concentrating on the development
of specialised products and specialising in particular segments of the production chain.
Furthermore, GVCs serve as critical facilitators of the international exchange of investment,
knowledge, and managerial practices that are in line with global standards, thereby
significantly bolstering domestic businesses. Gaining access to these globally recognised best
practices offers emerging economies unparalleled prospects for growth and the augmentation
of their export capabilities. (Mitra, Gupta, & Sanganeria, 2020)
However, India remains a fringe player in GVC.
India’s impact remains modest, representing only
1.5% of global GVC exports or $241 billion as of 2017, with
the largest share, about 10%, heading to the United States. Other key destinations
include Singapore (6.7%) , the People’s Republic of China(4.6%), and several European
countries. Exports to the US are largely in chemicals and metals, while exports to
China are predominantly raw materials. In contrast, services such as equipment rental
and transportation are the main GVC exports to Singapore. Additionally, India’s exports to
the European Union are diverse, ranging from metals to machinery rental services, as well as
textiles and electronics being significant GVC exports. (Mitra, Gupta, & Sanganeria, 2020).
With approximately 63 million Micro, Small, and Medium Enterprises (MSMEs) operating
in India, predominantly within sectors at the forefront of Global Value Chain (GVC) exports,
their integration into these chains is very important. However, they encounter a multitude
of challenges that hinder their ability to enter or advance within a value chain. MSMEs in
developing countries frequently find themselves constrained to lower value-added stages of
production due to the prohibitive investment and expertise required for more sophisticated
operations, risking functional downgrading or being perpetually confined to less profitable
niches. Additionally, while ascending a value chain presents more favorable opportunities for
learning and growth, it simultaneously imposes steeper entry barriers. These include stringent
quality standards, and the need for speed and adaptability, making it crucial for smaller firms
in these nations to align swiftly with the escalating demands.
India’s role in the global
economy has more than
doubled, from a
contribution to world
output in 1990 to
in 2017.
1.4%
3.2%
India remains
a fringe player
in GVC. India’s
impact remains
modest,
representing
only 1.5% of
global GVC
exports or $241
billion as of 2017,
with the largest
share, about 10%,
heading to the
United States. 29
To successfully address these barriers, it’s essential to focus beyond cost reduction
techniques. Enhancing efficiency, improving the quality of products and services, and
speeding up production and delivery are key. This improvement relies on better use of
resources and labor, fostering a culture of learning and innovation, upgrading processes,
and broadening sales avenues. Adopting such a comprehensive approach is vital for MSMEs
aiming to integrate themselves in the global value chain. (Caspari, 2003)
A low FVA-to-DVX ratio, where
a lower (or higher) ratio implies
a more active involvement in
upstream (or downstream)
tasks within global value chains
(GVCs). A lower ratio indicates
a heightened concentration on
supplying primary products or
engaging in natural resource-
intensive and low-value-added
activities. This characteristic
positions India among
developing countries, offering
insights into its distinct role in
GVCs and its focus on specific
segments of the production
chain.
1200000000
1000000000
800000000
600000000
400000000
200000000
0.00
China
China
China
India
India
India
Indonesia
Indonesia
Indonesia
Thailand
Thailand
Thailand
Viet Nam
Viet Nam
Viet Nam
Source: UNCTAD-Eora
Global Value Chain
Database
GVC participation
in selected Asian
Economies
Fig. 1
DVX
FVA 30
From the above graphs, it is clear that India's performance relative to peer Asian countries
has remained stagnant in backward global value chain (GVC) participation, while witnessing
a decline in forward GVC participation reveals important insights into the country's
positioning within the global economic landscape. This insight suggests both challenges and
opportunities for India, particularly in the context of its economic development and the role
of micro, small, and medium enterprises (MSMEs). India has been successful in integrating
into upstream stages but is facing challenges in downstream activities as the dynamics shift.
In that case, the country's strength lies in supplying essential components, raw materials, and
intermediate goods to global value chains. The declining trend in forward GVC participation
implies a need to address challenges in distribution, marketing, and sales of finished goods.
In this context, the emphasis shifts to enhancing India's capabilities in marketing, branding,
and accessing international markets for the final products. Indian MSMEs, recognising this
strength in upstream integration, can focus on building stronger connections with global
manufacturers and optimising their role as suppliers of critical components.
Source: OECD TIVA
Database
GVC participation
in selected Asian
Economies
Fig. 2
Japan
Japan
Indonesia
Indonesia
India
India
South Korea
South Korea
China
China
Viet Nam
Viet Nam
Bangladesh
Bangladesh
0.00
0.00
19981998
Forward GVC ParticipationBackward GVC Participation
20002000
20022002
20042004
2006
2006
2008
2008
2010
2010
2012
2012
2014
2014
2016
2016
2018
2018
2020
2020
2022
2022
0.02
0.05
0.04
0.10
0.06
0.15
0.08
0.20
0.10
0.25
0.12
0.30
0.14
0.35
0.16
0.40
0.18
0.45
0.20
0.50
0.22
0.24
0.26 31
In India, the Micro, Small, and Medium Enterprises (MSME) sector is of significant importance
due to its substantial contribution to employment, production, and exports. Based on the latest
data from the Ministry of Statistics & Programme Implementation, in the fiscal year 2021-22,
the MSME Gross Value Added (GVA) accounted for 29.2% of India’s Gross Domestic Product
(GDP). Likewise, the share of MSME manufacturing output in India’s total manufacturing output
for the same period stood at 36.2%, and MSME-specified products represented 45% of India’s
total exports (PIB, 2023). Role of
MSMEs in
India’s GVC
participation
rate
120 Million Jobs
MSMEs have also created a total of
generated across various industries in India.
They are an important link in the supply chain in various sectors like food processing, agriculture,
chemicals, electronics, textiles, and so on. The Indian government's strategic efforts in areas like
competitiveness, quality improvement, finance, and technology have led to a significant shift in
the sector, moving from basic consumer goods production to the manufacturing of advanced
products (Ghouse, 2014). Indian MSMEs, despite their impressive
metrics, remain a step behind global MSMEs. They hold a
strategic advantage with supportive domestic demand
and a thriving manufacturing sector. Yet, they are
predominantly engaged in midstream activities that
yield low-value addition and a lack of trade efficiency.
Strategic improvements in these areas could elevate
Indian MSMEs to meet international benchmarks and
norms, consequently fortifying their roles in supply
chains and facilitating their integration into
global value chains.
According to World Bank data on Micro,
Small, and Medium Enterprises (MSMEs)
2022, there are significant differences in
the performance of MSMEs businesses
((World Bank, 2022), (PIB, 2022)). 32
Performance
Comparison of
India’s MSMEs
with other
Countries.
Table: 1
MSME obstacles/challengesIndia South Asia All countries
Biggest Obstacle
Access to
Financial
Sources
(21.5%)
Political
Instability
(17.9%)
Access to
Financial
Sources
(15.3%)
Gender Representation (enterprises
having female ownership participation)
(%)
3.9% 13.8% 32.9%
Annual Labour Productivity Growth (%)-4.3% -3.1% -2.8%
Real annual sales growth (%) -1.5% 0.8 0.7
Innovation and Technology (firms
globally introduce new products or
services) (%)
5.8% 24.9% 36%
Customs (number of days to clear
direct exports and imports from
customs)
Exports - 17.3
days
Imports - 31.5
days
Exports – 12
days
Imports – 7.4
days
Exports – 14.1
days
Imports – 12.3
days
Source- (World Bank, 2022)
However, the comparison of MSMEs across the different economies is difficult and can
be misleading as the criteria for categorizing MSMEs vary globally. They are defined by a
number of factors and criteria, such as location, size, age, structure, organization, number of
employees, sales volume, worth of assets, and ownership through innovation and technology
(OECD, 2018), (Sobir, 2020). In many countries, SMEs are defined primarily by the number of
employees, while India, under the MSMED Act of 2006, defines MSMEs based on investment in
plant and machinery (Khatri, 2019).
In response to evolving economic dynamics, India underwent a significant overhaul of its
MSME definition in 2020. Recognising the limitations of the earlier framework, particularly
with distinct thresholds for manufacturing and service units featuring relatively low financial
limits, a reformed definition was introduced. Implemented on July 1, 2020, this new definition
incorporates a composite set of criteria, considering both investment in plant and machinery/
equipment and annual turnover. The revisions sought to achieve several overarching goals.
Firstly, they aimed to expand the MSME sector by increasing the investment and turnover
thresholds, providing a more comprehensive evaluation of business size across sectors.
By removing limitations on growth for existing MSMEs, the government incentivized their
expansion without compromising access to crucial support programmes.
Additionally, the adjustments targeted the simplification of classification and the reduction of
regulatory burdens for MSMEs. A single set of criteria applicable to both the manufacturing
and service sectors streamlined the classification process, contributing to a more business-
friendly environment. Furthermore, the government's vision extends to promoting a 33
more competitive MSME sector. The reforms incentivize these enterprises to enhance
competitiveness and efficiency by allowing MSMEs to grow within the MSME classification.
This strategic approach positions them to effectively compete with larger companies and
facilitates better integration into the broader economy. Revisions in the MSME definition
also influence the extent to which MSMEs are influenced by tariff liberalisation. Higher
benefits of liberalisation can be accrued by introducing more flexible limits on investment
for MSMEs (Mukherjee & Chanda, 2021). This adjustment aims to align with contemporary
economic realities, establish a more objective classification system, and facilitate a conducive
environment for business operations. (Ministry of MSME, 2023).
Prioritizing the government's capacity to flexibly adapt and adopt a forward-thinking policy
approach is crucial for effectively addressing the growing complexities within and around
the MSME sector. This takes precedence over mere alterations in definitions and is essential
for ensuring true inclusivity. This adaptability is crucial in creating an enabling ecosystem
that supports the growth and resilience of businesses in an ever-changing world. The
first step towards this is understanding the challenges faced by MSMEs and what drives
the competitiveness of MSMEs across regions and industries is a prerequisite. This paper
aims to comprehensively analyse India-centric policies affecting MSMEs, evaluate their
competitiveness, examine their integration into Global Value Chains (GVCs), and offer strategic
policy recommendations to navigate future challenges.
The first step towards this is understanding the challenges faced
by MSMEs and what drives the competitiveness of MSMEs across
regions and industries is a prerequisite. 34
01
Outline
of the Paper
This paper is structured into four key chapters,
each meticulously designed to contribute to
the comprehensive understanding of Small and
Medium Enterprises (SMEs) competitiveness.
Chapter
Understanding MSMEs Challenges
for Enhancing Competitiveness
Competitiveness
Framework: MSMEs and the
Path to Prosperity
In this initial chapter, we explore the challenges faced
by Micro, Small, and Medium
Enterprises (MSMEs).
By scrutinizing these
challenges, we aim to lay the
groundwork for a profound
comprehension of the
intricate dynamics influencing
their competitiveness.
Building upon the insights garnered from the
challenges delineated in the first chapter; the
second chapter explores the competitiveness
framework and cluster approach’s concept. This
framework serves as a guiding compass, charting
the trajectory for MSMEs on the path to prosperity.
Chapter02 35
04
Chapter
Policies for MSMEs in India
The final chapter of this paper delves into the policy landscape governing MSMEs in
India. We aim to unravel their efficacy in enhancing competitiveness by scrutinising
existing policies. This evaluation serves as a crucial step towards proposing
recommendations for a more robust and adaptive policy framework.
03
Chapter
Understanding MSMEs Competitiveness in
India Using Clusters Approach
In the third chapter, we adopt a nuanced approach by leveraging the
Clusters methodology to comprehend the competitiveness of MSMEs in
5 sectors in the Indian context. By exploring the synergies and dynamics
within clusters, we seek to uncover unique insights that contribute to a
more tailored understanding of competitiveness.
Throughout this exploration, our
overarching objective is to identify
challenges and provide a forward-
thinking perspective on understanding
MSME competitiveness. We emphasize
the importance of adaptability in policy
formulation and strategic approaches,
essential for addressing the evolving
intricacies within and surrounding the
MSME sector. Through this paper,
we have strived to contribute
meaningfully to the ongoing discourse
on SME competitiveness.
  36
Understanding
MSMEs Challenges
Chapter 1
for Enhancing Competitiveness 37
GVCs serve as critical facilitators of the international exchange
of investment, knowledge, and managerial practices that are
in line with global standards, thereby significantly bolstering
domestic businesses
I
ndian MSMEs grapple with a myriad of challenges, ranging from difficulties in timely
access to information, irregular and inappropriate financial resources, shortage of
quality human capital, access to credit and low-cost technology, and the prevalence of
large-scale informality that impedes their growth trajectory (Kapoor, 2023). According to
an enterprise survey by the World Bank, the following are the biggest obstacles SMEs face
in India.
Existing research highlights key obstacles hindering the growth and competitiveness
of Micro, Small, and Medium Enterprises (MSMEs) in India. A thorough examination and
comprehension of these concerns are crucial for developing successful strategies and
interventions to overcome the challenges MSMEs encounter, thereby enhancing their
resilience and competitiveness in the Indian economy.
Biggest Obstacles
faced: By
manufacturing and
services SMEs in
India- 2022
Fig. 3
0
2
4
6
8
10
12
14
16
18
20
Percent
of firms
choosing
customs
and trade
regulations as
their biggest
obstacle
Percent
of firms
choosing
electricity as
their biggest
obstacle
Percent
of firms
choosing
inadequately
educated
workforce as
their biggest
obstacle
Percent
of firms
choosing
labor
regulations
as their
biggest
obstacle
Percent
of firms
choosing
political
instability
as their
biggest
obstacle
Percent
of firms
choosing
practices of
the informal
sector
as their
biggest
obstacle
Percent
of firms
choosing tax
administration
as their
biggest
obstacle
Percent
of firms
choosing
tax rates as
their biggest
obstacle
Source: Enterprise
Survey, World Bank
2022
2022 Manufacturing
2022 Services 38
Challenges
MSMEs face
are:
Formalisation
1.
Informal firms rarely undergo formalisation. Only 9% of the
registered firms start out as unregistered. (Porta & Shleifer,
2014). MSMEs dominate the informal sector, ILO estimates
about 90% of the informal sector are MSMEs
3
(ILO,
2023). These unregistered, informal firms tend to
be constrained to an ecosystem associated with
low income and low entry barriers; disjoint from
the formal space (Ishengoma & Kappe, 2006)
(Mehrotra & Giri, 2019)). This informality within firms
significantly hampers their integration into Global
Value Chains (GVCs). Enhanced integration into
GVCs is predominantly influenced by two critical
factors: competitiveness and connectivity (ADB,
2015). For firms to bolster their competitiveness and
connectivity, an enabling environment must allow
them to effectively leverage policy frameworks and
market mechanisms.
Existing research highlights key obstacles hindering the growth and competitiveness of Micro,
Small, and Medium Enterprises (MSMEs) in India. A thorough examination and comprehension
of these concerns are crucial for developing successful strategies and interventions
to overcome the challenges MSMEs encounter, thereby enhancing their resilience and
competitiveness in the Indian economy.
3
https://www.ilo.org/employment/units/emp-invest/informal-
economy/lang--en/index.htm#:~:text=The%20informal%20
economy%20comprises%20more,Small%20Enterprises%20
(MSEs)%20worldwide
Percent
of firms
choosing
access to
finance as
their biggest
obstacle
Percent
of firms
choosing
access to
land as their
biggest
obstacle
Percent
of firms
choosing
business
licensing and
permits as
their biggest
obstacle
Percent
of firms
choosing
corruption
as their
biggest
obstacle
Percent
of firms
choosing
courts
as their
biggest
obstacle
Percent
of firms
choosing
crime, theft
and disorder
as their
biggest
obstacle
Percent of
firms choosing
transportation
as their
biggest
obstacle
0
5
10
15
25
20
Biggest Obstacles
faced: By
manufacturing and
services SMEs in
India- 2022
Source: Enterprise
Survey, World Bank
2022
2022 Manufacturing
2022 Services 39
The contribution of MSMEs compared to their proportion in the total firms is abysmal due
to multiple internal, external, and firm-level factors. Internal factors include the quality of
human capital, utilization of technology, and working capital; external factors include access
to financial services, social and business security services, infrastructure, and so on. Other
firm-level factors, such as linkages with other firms, hinder their growth (Ishengoma & Kappe,
2006).
Against this background, formalization can be a solution. The advantage of formalization is
access to a range of government subsidies and rewards, legally binding business agreements,
tax advantages, access to established financial channels, and additional motivators. With
improved access to these resources, enhancing productivity becomes more feasible through
technological advancements in production and digitalization and is the primary step toward
establishing MSMEs in the Global Value Chain. (Kapoor & Kowadkar, Gradual shift from
informal to formal for MSMEs, 2022). However, there are disadvantages to formalization as
well in the current business and regulatory environment, especially in developing economies.
Research points out that small and medium enterprises (SMEs) with a higher degree of
formality still face the same obstacles as those with a higher level of informality, along with
high cost of operation and reduction in government exemptions (Weder, 2003).
Various countries have been addressing the need to formalize small businesses. Kenya
introduced the Micro and Small Enterprise Act in 2012, creating an authority to support these
enterprises. China has established Employment Service Organizations, like the SCESO in
Shanghai, to help informal businesses with various aspects of establishment and operation.
South Africa’s 1994 national small business strategy aims to assist SMEs in becoming more
competitive and connected to formal markets, with the National Productivity Institute
providing training and support. These efforts highlight a global commitment to empowering
small and informal businesses.
In India, there have been a few initiatives that are changing the formalization landscape of
MSMEs. The Aadhaar Memorandum (UAM), the previous platform for registering MSMEs in
India, had 1.02 crore registrations from September 2015 to June 30, 2020. The Udyam portal
replaced UAM on July 1, 2020, to simplify registration. In just two years, Udyam has garnered
over 90 lakh registrations, nearing the 1 crore mark (MSME Desk, 2022). The Udyam database
is merging with NCS, e-Shram, and ASEEM portals to formalize micro-enterprises.
Currently, Udyam has around 95 lakh MSMEs registered. The MSME Ministry is addressing
the delayed payments issue by collaborating with state governments. The Udyam Registration
Portal (URP) by the Ministry of MSME, Govt. of India, facilitates online MSME registration and
In India, there have been a few initiatives that are changing the
formalization landscape of MSMEs. The Aadhaar Memorandum (UAM),
the previous platform for registering MSMEs in India, had 1.02 crore
registrations from September 2015 to June 30, 2020. 40
provides Unique Registration Numbers (URN) and Udyam Assist Certificates (UAC). URN is
crucial for MSMEs to access priority sector lending. However, several of the estimated 6.34
crore MSMEs, mainly Informal Micro Enterprises (IMEs), remain unregistered due to various
barriers. To help IMEs formalize, an ‘Assist Methodology’ is proposed. Designated Agencies
(DAs) like banks, NBFCs, and MFIs will assist IMEs in registration. The central URN will play
a key role in MSME formalization, making Udyam-registered IMEs eligible for priority sector
loans and facilitating digitalization (MSME Formalisation project, 2023). Along with this, GST
has eased tax compliance and influenced formalization. However, stringent labour laws, tax
burden, complex regulations and extensive costs as a result of formalization acts as deterrents
for the formalization of MSMEs
Adoption of an all-of-economy approach that addresses a multitude of challenges faced by
enterprises at all levels- from reasons to stay unregistered and issues after formalization to
assessing the degree of formalization necessary in an economy is vital. 41
Access to Finance
2.
Released by RBI, Statements I and II set out data on the sectoral deployment of bank
credit collected from 41 select scheduled commercial banks, accounting for about 95% of
the total non-food credit deployed by all scheduled commercial banks.
A compilation of data from these statements for the latest month, which is September, in
conjunction with older data released by RBI for the same months in the past four years, shows
that the credit share of
14%
in September
2020 to
20%
in September
2024
Micro and Small enterprises has consistently increased, rising from
to
While the growth is slower compared to micro and small enterprises, the share of medium
enterprises has gradually increased from 4% in September 2020 to 9% in September 2024.
This reflects a positive trend for MSMEs in terms of bank credit deployment. Efforts by
financial institutions and governments to enhance credit flow to these sectors have been
successful.
Change in share of
Sectoral Deployment
of bank credit in the
across industries
Fig. 4
Sep,2020
Mar,2021
Sep,2021
Mar,2022
Sep,2022
Mar,2023
Sep,2023
Mar,2024
Sep,2024
0%
20%
40%
60%
80%
100%
Source: RBI Sectoral
Deployment of Bank
Credit – September
2024, September 2023,
and September 2022
Micro and Small
Medium
Large
14
82
4 5
6
7 8 8 8 8 9
15
81
16
78
17
76
18
74
19
73
19
73
20
72
20
71
CAGR of the Sectoral
Deployment of Bank
Credit
Fig. 5
Industry Micro and Small MediumLarge
Source: RBI Sectoral
Deployment of Bank Credit –
September 2024, September
2023, and September 2022
Sep 2020 to Sep 2024
Mar 2021 to Mar 2024
0%
5%
10%
15%
20%
25%
30%
35%
7.64%
7.15%
29.08%
4.11%
7.57%
18.80%
29.93%
3.54% 42
Additionally, credit growth in the Micro and Small and Medium Segments from September
2020 to September 2024, at a CAGR of 17.15% and 29.08%, respectively, was much higher
than the industrial average of 7.64%.
However, even with these metrics of rising credit availability to MSMEs, there has been high
incidence of credit gap in the sector. The perception of SMEs as high-risk and commercially
unviable entities has resulted in limited SMEs receiving formal financial assistance (Ambrose,
2012). Indian banks, in particular, are hesitant to finance small enterprises due to reasons such
as the inability to provide collateral, high levels of nonperforming assets, high transaction
costs, and difficulties in verifying the creditworthiness of applicants (Prasad, 2006). Along with
this, the financial services that banks offer are often insufficient to meet the needs of early-
stage SMEs in India (Banerjee, 2006).
₹80 Lakh crores
FY21 MSME credit
Total MSME demand of debt ₹69.3 lakh crore as of FY 17
Formal sources of ₹10.9 lakh crore
Increased to
Informal sources/Credit Gap MSME
demand of ₹58.4lakh crores
The credit gap is met
through informal sources
Source: IFC Report on Financing India’s MSME Nov 2018; Industry Report on Small Business Loans in India, Five-Star Business Finance and
CRISIL, November 2021
In fiscal 2017, only 16% of the Rs 69.3 trillion MSME credit demand was met through formal
financing, leaving a credit gap of Rs 58.4 trillion, primarily filled by informal sources with
interest rates of 30% to 60%. The gap widened further due to the 2020 economic slowdown
and the COVID-19 pandemic. Despite relief from schemes like ECLGS, by fiscal 2021, only 19%
of the Rs99 lakh crore credit demand was formally met, with CRISIL estimating the credit gap
to have grown to Rs80 lakh crore.
Accessing external finance from sources other than banks is costly, limited, and poses a
challenge to SMEs despite being essential for long-term growth and goals (Biswas, 2014).
Due to constraints in accessing bank credit, MSMEs are forced to employ alternative sources
of finance. While accessing finance from formal institutions, MSMEs face several barriers,
including the need for collateral or guarantees, inflexible policies, high lending rates, lengthy
procedures, entrepreneurs' limited financial knowledge of available schemes, high service fees
and complex regulatory frameworks (Singh & Wasdani, 2016) , (Ambrose, 2012)). This restricted
access to financial resources hampers the growth and survival prospects of Indian MSMEs.
Barriers have also been examined in the context of gender (Irwin & Scott, 2010), firm size, the 43
length of lending relationships, and the use of overdraft credit (Bebczuk, 2004). The Reserve
Bank of India (2005) has identified several issues in financing SMEs, including inadequate
access to finance for small firms due to a lack of financial information and non-formal business
practices, limited access to private equity, venture capital, and secondary market instruments,
fragmented markets for inputs and vulnerability of products to market fluctuations, limited
access to technology and product innovations, lack of awareness of global best practices, and
significant delays in settlement of dues and payment of bills by large-scale buyers. A reduction
in the cost of credit, time barriers and documentation is necessary to ease the procurement of
finance (Grant Thornton, FICCI, 2011)
Some of the reasons for the low financial inclusion of SMEs are no effective management tool
in place, lack of knowledge of banking guidelines, and ineffective mechanisms to weigh the
creditworthiness of the company (Subramanian & Nehru, 2012). To increase access to finance,
confidence in the abilities of MSMEs and remedial measures for investors is necessary.
To increase access to finance, confidence in the abilities of MSMEs and
remedial measures for investors is necessary.
Skill Gap
3.
Between 2014 and 2022, the number of skilled employees in medium, small, and large
enterprises witnessed significant growth, with increases of 19.94%, 20%, and 12.72%,
respectively, as reported in the World Bank Enterprise Survey data.
Large enterprises Medium enterprises Small enterprises
19.94%12.72%20%
Nonetheless, the increase in skilled labour is relatively modest compared to the development
pace seen in the past decade. A significant mismatch exists between the quantity and
calibre of available skills and the skills needed. This discrepancy is highlighted by the Global
Innovation Index ranking (WIPO, 2023), revealing a 3.9 percentage point decline in knowledge-
intensive hiring from the already modest 12.96% recorded in 2022. This continues to hinder
the development of MSMEs. 44
A 2009 study by NCAER on India’s Textile and Clothing sector found that there is a massive
gap between the availability of skilled labour and the needs of the industry. It recommends
industry-specific skill development and revisions in labour law to overcome these barriers.
They point out that a highly skilled labour pool is required to move towards value products,
which is required for the development of the industry through innovation and R&D. MSMEs
are also unable to hire skilled labourers on the managerial level due to the informal nature of
the industry and better employment opportunities available for such skilled workers due to
the informal nature of the industry and better employment opportunities available for such
skilled workers (Khatri, 2019). The scarcity of skilled labour is a significant obstacle for MSMEs,
hindering their capacity to innovate, enhance production standards, and scale their operations.
These are essential steps for establishing a strong foothold in Global Value Chains.
The diversity and scattered structure of MSMEs call for focused skill development
programs. Cluster-based targeting of skills training, developing sector-specific occupational
standards, exploring cost-sharing models for skills training of existing employees, and clearly
understanding the needs of unregistered MSMEs will help bridge the skill gap and enhance
SMEs’ competitiveness (Sinha & Pental, 2017).
Technology and Innovation
4.
Given the significance of the MSME sector, it is crucial to ensure the competitive position of
Indian SMEs, both on the national and international stages, with technology and innovation
serving as pivotal factors. Research has highlighted the importance of investing in Research
and Development (R&D) activities, improving quality control processes, and fostering
innovation ecosystems to enhance MSME competitiveness (C, 2013); (Kanerva, Arundel,
& Rene). Moreover, the ability to adapt and incorporate emerging technologies, such as
digitalization and automation, is increasingly vital for competitiveness (OECD, 2019). On the
Innovation front, India holds the 40th position among 132 economies in the 2023 Global
Innovation Index by WIPO (PIB Delhi, 2023), assessing innovation through 80 indicators. Indian
manufacturing relies heavily on labour-intensive activities, hindering their potential in GVCs.
Despite improvements since 2015, India’s innovation performance needs enhancement,
especially within MSMEs, to boost competitiveness.
Research highlights the challenges faced by small and medium-sized enterprises (SMEs) in
India regarding technology and innovation. Patchouri & Sharma (2016) found that smaller
firms often rely on domestic sources for technology, with only a small fraction sourcing
from abroad or collaborators. Singh (2019) identified several issues impeding technology
innovation implementation in Northern India’s small firms, such as inadequate human
resource management, difficulty in acquiring affordable raw materials, and unreliable power
supply. Unlike their counterparts in developed economies, these factors limit SMEs’ access
to international technology and innovation. In the Philippines, Ceuto et al. (2022) explored
the drivers and barriers to digital innovation among MSMEs, citing a lack of digital skills,
digital market challenges, and insufficient internet infrastructure as significant hurdles.
The diversity
and scattered
structure of
MSMEs call for
focused skill
development
programs. 45
Product Diversification
5.
Lack of diversification and innovation in product design is a key deterrent to MSME growth in
India. Indian MSMEs with diversified products and services witnessed a growth in customer
base by 18%, as compared to players with limited diversification. Despite this, a lack of
awareness of market trends, lack of technical knowledge for product diversification, and the
high investment cost required in machinery, skilling, and marketing discourage MSMEs from
diversifying (Mitra, Nikore, & Gupta, 2021)
India’s SMEs have been unable to establish a distinct brand value, internationalise their
products and establish themselves as important players in the value chain. Excessive costs of
product development, lack of effective selling techniques, unsophisticated marketing, lack of
market research, and lack of funds for implementing expensive software, projects themselves
as major barriers to SME competitiveness. (March-Chorda, 2002), (Xiong, 20016)). These
barriers lead SMEs to remain local and distanced from GVCs, as they produce low-technology
products (Pradhan & Das, 2013) that have low profitability and are misaligned with market
needs.
Strategies that address the issues relating to complex regulations, accessibility to finance,
infrastructure, and export promotion which can be employed at both individual and national
levels are necessary. A simplified regulatory framework, good governance, accessible finance,
proper infrastructure, and availability of foreign market information will help SMEs in the
promotion of their products (Bonga, 2017) . It is imperative to gain a thorough understanding
of the competitive landscape, market analysis, and regulatory aspects in both domestic and
global markets. This knowledge will enable MSMEs to diversify their products and establish a
presence in both national and international markets.
Despite government efforts to boost small-scale industries, technological stagnation persists,
hindering the sector’s progress (Bhavani, 2002).
In many developing nations, a substantial proportion of small and micro businesses are
established out of necessity for mere survival. In such cases, entrepreneurial spirit is one of
the key factors in the survival of enterprises, as it enables businesses to adapt to evolving
economic circumstances (Ligthelm, 2010) . In order to adapt to market dynamics, maintain
competitiveness, and enable the enterprise to navigate market complexities, entrepreneurial
behaviour and organizational innovation have a significant impact on overall performance
and enable enterprises to adapt to market dynamics, maintain competitiveness, and navigate
market complexities (Oyong, 2019).
Understanding the associations between technology and innovation and engaging in
coordinated actions between technology and innovation will fortify the competitiveness of
SMEs. 46
Tax compliance
6.
Taxes and the economy are closely interconnected, and whenever there is a significant change
in the tax system, it becomes crucial to assess its impact on the relevant industry and the
associated businesses (Bhalla, Sharma, & Kaur, 2023).
A recent Enterprise Survey Study (World Bank, 2022) revealed that tax rates and compliance
was one of the top three business environment constraints for small, medium and large
enterprises, with its prominence as a constraint having risen from 2014 to 2022. This barrier
is clearly reflected in the imbalance in GST tax revenue. As of June 2023, Proprietorships that
form a maximum of 80.41% taxpayer base contribute only roughly 13.32% of the total revenue
from GST (GSTN, 2023).
It is evident that tax systems for MSMEs should be designed to align tax compliance
requirements with the capacity of SMEs. The tax system for SMEs should minimise compliance
costs and enhance accessibility on the MSME end and should be easy to administer and
implement on the authorities’ side ((Ponorica & Al- Saedi), (Awasthi, 2011)). Tax compliance
brings more enterprises into the formal sectors, providing better access to finance, and
opportunities for collaboration. (World Bank, 2011).
This restructuring is especially important in India as most SMEs perceive the tax system to
be unfair and inequitable, and tend to stay out of the formal economy. The simplification of
income tax procedures for SMEs, informed by past experiences, perceived fairness, taxpayers’
ability, taxpayer feedback, and lessons from other tax systems, is recommended to form a solid
foundation for sound tax policy decisions ((Gabriela and Juhi (2015), (Awasthi, 2011), (Ponorica
& Al- Saedi), (Musimenta , Muhwezi, & Akankunda, 2017)).
It is evident
that tax
systems for
MSMEs should
be designed
to align tax
compliance
requirements
with the
capacity of
SMEs.
Contribution to
GST Revenue
from Different
Constitutions of
Business
Fig. 6
Public Sector
Undertaking
Public Limited
Company
Limited Liability
Partnership
Society/Club/
Trust/AOP
Private Limited
Company
Partnership
Proprietorship
Others
Source- GSTN, 2024
Percentage of
Taxpayers
Percentage
of Collection
0% 10% 20% 30% 40% 50% 60% 70%90%80%
0.02%
9.94%
0.52%
34.40%
0.80%
1.20%
0.88%
1.40%
0.93%
4.14%
6.11%
28.32%
10.34%
7.27%
13.32%
80.41% 47
Infrastructure
7.
A deficiency in infrastructure support in developing nations challenges SMEs’ growth
prospects (Olawale & Garwe, 2010). In India, inadequate infrastructure support is one of the
major non-financial barriers faced by MSMEs (Singh & Paliwal, 2017). A major concern for the
growth and development of MSMEs, as reported by the Small Industries Development Bank of
India (SIDBI) in 2010, is the lack of infrastructure support. According to a survey by PHDCCI,
the Indian MSME sector has identified several obstacles to business growth, including
inadequate infrastructure, outdated labour laws, multiple taxes, and the uncooperative attitude
of government officials (PHD Chamber of Commerce and Industry , 2022). Furthermore, many
MSMEs in rural and semi-urban areas still face a lack of essential infrastructure such as power,
roads, and communication services, which hinders their efficiency and overall development.
Good and Service Tax (GST) has been one of the most impactful tax reforms in India. In the
context of GST’s impact on MSME (Bhalla, Sharma, & Kaur, 2023) highlight the positive impact
of the GST system on business performance, citing enhanced operational efficiency and
transparency in the indirect tax structure. It also highlights the benefits of input tax credits and
the prevention of stock leakages, which have contributed to improved MSME performance by
reducing working capital blockages. While GST has these advantages and has increased tax
neutrality, it also introduces challenges such as the need to reduce the basic exemption limit,
differentiate tax rates for luxury goods and services, manage business costs, and decrease GST
compliance expenses
A brief overview of the research on other developing economies and tax compliance reveals a
similar picture. Tax compliance of Indonesian SMEs is influenced by the probability of audit, tax
knowledge, and the perception of equity and fairness (Inasius, 2018) . Turnover growth of SMEs
in Cameroon is affected by tax regulations and the time required to comply with tax (Akinboade,
2015) . In China, a positive relationship between tax compliance and digital finance was observed
(Ouyang, Liu, & Li, 2023) . In Vietnam, corruption has a significant and negative effect on Tax
compliance, as is the case in many developing nations (le et al, 2020, (Awasthi, 2011)
Tax compliance proves to be a vital determinant in the growth of SMEs and has a major multiplier
effect. Not only from the point of view of competitiveness of MSMEs but tax compliance is an
important factor contributing to the country's tax revenue (Sihombing, 2021) .Hence, as stated,
revamping tax systems to account for the tax-to-turnover ratio of small enterprises, tax-paying
abilities, industry structure, and administrative inefficiencies is necessary.
Tax compliance proves to be a vital determinant in the growth of SMEs
and has a major multiplier effect. Not only from the point of view of
competitiveness of MSMEs but tax compliance is an important factor
contributing to the country’s tax revenue 48
Inadequate infrastructure is one of the key reasons why MSMEs in India, despite being
competitive have failed to establish themselves in the global market. They continue to face
bottlenecks due to a lack of adequate transportation facilities like railways, waterways,
roadways and airways, high cost of transportation, poor public transport, low/no access to a
reliable power supply, poor drainage systems, lack of proper communication channels, lack
of appropriate storage facilities, inadequate marketing facilities, lack of funds, and so on.
(Prakash, Kumar, & Verma, 2021) (Singh & Paliwal, 2017)
The Ministry of Micro and Small Enterprises has actively participated in this regard, and there
have been various attempts by the government to create infrastructure-focused schemes
(such as the Infrastructure Development Programme, Scheme of Fund for Regeneration
of Traditional Industries, and so on). In 1998 it established ‘The Integrated Technology
Upgradation and Management Programme’ (UPTECH). This policy was revised twice and later
renamed “Micro and Small Enterprises – Cluster Development Programme (MSE – CDP)” in
2010. The scheme has a cluster-based approach to highlight the needs and requirements
of a sector. This scheme aimed to develop market-linked infrastructure development where
development facilities and centralised distribution are in collaboration with state governments,
setting up exhibition centres and establishing testing centres to tap the international markets.
This initiative, which spans across various clusters throughout India, ensures the maintenance
of product quality for both domestic production and international export.
Even though such forward-looking initiatives have been undertaken, the implementation of
these policies has been inefficient. A need for revising policy objectives according to the
changing dynamics, accountability and convergence in all tiers of government with respect
to the administration and implementation of these policies is crucial. A collaboration between
private and public stakeholders for expansion and diversification of resources will make
policies holistic in their approach as well as increase their impact on the economy. 49
Policy Environment
The “Missing Middle” Problem
8.
9.
Government policies have a significant impact on entrepreneurship, and the right approach
depends on factors like attitudes of the population on starting businesses, the workforce,
government size and role, the current state of entrepreneurship, and the situation of small and
medium-sized businesses (SMEs) (Asghar, Paghaleh, & Khaksar, 2011).
Over the years various policies, schemes and initiatives such as ECLGS, Startup India,
SAMRIDH, Startup India Seed Fund scheme (to SMEs, MSMEs), and Atmanirbhar Bharat along
with tax reforms have created a favourable environment and given room for SMEs to scale
(Kadaba, Aithal, & Sharma, 2023). While these efforts are contributing to the development of
MSMEs, there is limited awareness about the support systems and resources created to assist
this sector. Furthermore, enterprises face challenges comprehending and accessing these
initiatives. A need for thorough surveys to identify the technical and financial requirements of
MSMEs for a better understanding of the ground reality and engagement of larger enterprises
with advanced expertise will bolster the growth of MSMEs (Khatri, A Study of the Challenges of
the Indian MSME Sector, 2019) .
Despite the implementation of several government initiatives, there exist visible deficiencies
within this sector that require attention. A crucial measure in bridging these gaps involves
conducting impact evaluations of pivotal government programs and formulating policies
that target the key variables impacting the growth of MSMEs (Gautam, 2022) . However, a
thorough examination reveals a notable deficiency in current research. There is a need for an
investigation into the alignment between government policies and the needs and challenges
encountered by the MSME sector, along with an evaluation of the effectiveness of these
initiatives. his will aid in addressing the intricacies and implementing tailored strategies
necessary for resolving the complexities in this sector.
The “Missing Middle” phenomenon, a term denoting the underrepresentation of medium-sized
enterprises in the manufacturing sector, particularly within developing nations, has prompted
significant research. Initially highlighted by Dhar and Lydall (1961), this phenomenon was
identified through the conspicuous absence of firms employing between 50 to 499 workers
within Indian manufacturing employment data. Building upon this foundation, Tybout (2000)
observed that not only are small and mid-sized enterprises absent in impoverished nations,
but that this absence might be attributed to stringent business regulations. These regulations
seemingly favor larger entities, leaving smaller firms to grapple with compliance challenges
disproportionate to their limited resources.
Through an empirical analysis, Krueger (2009) reveals a U-shaped curve characterising
the size distribution of manufacturing employment in India, where the smallest firms (6-9 50
workers) were most prevalent, and those employing 50-99 workers were least represented.
She argued that excessive regulations intended to protect workers within the organized sector
inadvertently stifled small firm growth, as expansion led to prohibitive cost increments.
Nagaraj (2018) posits that the industrial labour market in India is characterised by a stark
dualism, highlighted by highly efficient, urban-based manufacturing, as opposed to traditional,
subsistence-oriented informal employment. Abreha, Cirera, Davies, and Fattal–Jaef (2022)
empirically demonstrate in sub-Saharan Africa that medium-sized firms contribute modestly to
employment, a situation exacerbated by informal firms and regulatory distortions rather than
the size of new entrants. Echoing this, Little (1987) identified a historical bimodal employment
distribution resulting from state-led heavy industrialisation favouring large factories and small
cottage industries, creating a gap in the middle. This missing middle is more pronounced
in India than in other Asian economies, suggesting a unique set of organisational and
technological challenges within its manufacturing sector (Hasan & Jandoc, 2010).
According to the Udyam Registration portal, as of November 2023, out of 3,06,24,320 MSMEs
registered, 3,05,60,814 are classified, among which, there are about 97.92% micro, 1.89% small
and 0.01 % medium enterprises.
Percentage of
Micro, Small
and Medium
of Registered
MSMEs
Fig. 7
Source: UDYAM
Registration
Portal (https://
udyamregistration.
gov.in/Government-
India/Ministry-MSME-
registration.htm)
MicroMedium
Small
97.92%
1.89%0.01% 51
Mehrotra and Giri (2019) use integrated data from formal and informal firms in India to
analyse enterprise size distribution, particularly in the manufacturing sector, and to identify
factors contributing to micro and small firm concentrations. Their findings reveal that over
90% of Indian MSMEs are micro-enterprises, employing 40% of the workforce, with a missing
presence of small enterprises. The concentration of micro-firms is attributed to factors like
low productivity, limited access to finance, and regulatory barriers. Notably, there is a dearth
of small and medium-sized enterprises, with a significant proportion falling into the Own
Account Enterprises (OAEs) category. Policymakers have largely overlooked these small units,
as have the enterprises in the unorganised sector. Their research implies that there is not
only a missing middle but a missing small as well. They argue for a new policy framework that
addresses specific constraints, advocating for policies that foster growth while creating an
enabling environment for MSME development. (Mehrotra & Giri, 2019)
Globally, the extent of labour regulations tends to rise in correlation with the size of factories
and businesses. Due to the substantial costs associated with compliance, these regulations
pose a compliance burden and prevent enterprises from organically expanding in size and
harnessing economies of scale in production. This gives rise to the “missing middle”.
The missing middle phenomenon in India is a complex challenge, but it is one that must be
addressed through a comprehensive policy framework that takes into account the unique
needs of small and medium-sized enterprises. This framework should foster growth, take into
account labour and industrial structure, and prioritise bringing these enterprises into the
policymaker's frame of reference.
Policymakers have largely overlooked these small units, as have the
enterprises in the unorganised sector. Their research implies that there is
not only a missing middle but a missing small as well. 52
Competitiveness
Framework:
Chapter 2
MSMEs and the Path to Prosperity 53
While the crucial role played by MSMEs in fostering shared prosperity is widely
recognised, both government and business leaders continue to grapple with the
question of how to effectively address the challenges hampering SME development
and competitiveness. This acknowledgement is coupled with the acceptance of
various challenges MSMEs face that impede their growth and competitiveness. The
urgency of addressing longstanding challenges such as limited access to credit
markets, inadequate market linkages, and outdated technology has become even more
pronounced (Daño-Luna, Maribel, & Francisco, 2018). This heightened urgency is driven
by the evolving structure of the marketplace, the constraints posed by limited resources,
the management capabilities (Deniz, 2013), (Hautz, 2014), and the ongoing need for
continuous capacity building. In this context, improving competitiveness emerges as the
sole pathway to survival (Chobanyan & Laurence, 2006).
Emerging in the 1980s, the concept of competitiveness was studied by Buckley,
Pass, and Prescott (1988) by examining extant literature which reveals the difficulty
in measuring competitiveness at the levels of country, industry, firm, and product
(Buckley, 1988). Michael Porter (1990), in his book ‘The Competitive Advantage of
Nations’, outlined a new approach to competitiveness. A concept that was approached
mainly through a macroeconomic lens or a focus on resources inherent to a location,
took on a productivity-based framework in this seminal work. This break-away from
other conceptions of competitiveness emphasized that it is not about what a location
possesses, but how productively the firm or the nation uses available resources.
Porter highlights the importance of building microeconomic capabilities in the national
business environment where firms compete, without which the broader macro-framework
would not bear fruit . This understanding is especially significant in the Indian business
scenario which harbours a majority of small enterprises. The expectations and actions of
firms, customers, suppliers, and associated institutions must be taken into consideration.
The competitiveness framework thrust on assessing microeconomic foundations of
economic activity will help in capturing this aspect.
Porter highlights the importance of building microeconomic
capabilities in the national business environment where firms
compete, without which the broader macro-framework would
not bear fruit . This understanding is especially significant in
the Indian business scenario which harbours a majority of small
enterprises. 54
This approach transcends the mere geographic proximity of producers or industries. It
considers the interconnections between diverse firms and institutions within a given location.
Porter’s
Diamond
Model
&
The Microeconomic pillar is composed of two essential components
The presence of related and
supporting industries.
The quality of the business
environment in the nation
Using the diamond model as a tool to measure national competitiveness, Porter has proposed
a competitiveness gauge to assess the business environment of a nation or a firm. The
diamond model is, thus, an integral aspect of the microeconomic pillar of the competitiveness
framework (Ketels, 2017). This model comprehensively considers factor conditions, demand
conditions, related and supporting industries, the structure of strategy, and rivalry. These
factors make up the national environment where companies are born and learn how to
compete.Firm strategy, Structure
and Rivalry
Related and supporting
industries
Factor ConditionsDemand Conditions
Source: Michael Porter, On Competition, 1990
Factor Conditions encompass a nation's intrinsic resources and capabilities, spanning
skilled labor, infrastructure, and natural resources. The quality and quantity of these
factors intricately shape the overall competitiveness of a country. Demand Conditions,
another facet of the model, pivot on the nature and extent of demand within the domestic
market, acting as catalysts for innovation and product development. A sophisticated and
demanding local market serves as a driving force, compelling firms to enhance their offerings
through continuous improvement and innovation. The aspect of Related and Supporting
Industries underscores the significance of robust, interconnected industries and supportive
infrastructure, collectively contributing to the competitiveness of a particular industry. The 55
Macroeconomic Policy
Microeconomic Policy
DIAMOND
CLUSTER
Firm Level (Large Enterprises
MSMEs etc)
synergy among these industries within clusters creates a mutually reinforcing environment,
fostering overall competitiveness. Lastly, Firm Strategy, Structure, and Rivalry delineate the
conditions governing the creation, organization, and management of companies, coupled
with the intensity of domestic competition. The presence of vigorous domestic competition is
highlighted for its potential to spur innovation and operational efficiency among firms. Each
factor in this model and the interplay of the four together affect essential ingredients for
achieving international competitive success. Some economies have an interplay of these four
factors that harbours an environment conducive to growth for certain companies.
The diamond model provides nuanced insights into the dynamics of competitiveness.
Transitioning from this microeconomic perspective, the overarching business environment
illustrated in the figure below, exerts deterministic forces originating from historical,
geographical, and culturally-bound institutions (1). In contrast, policy choices provide
opportunities for citizens to actively sculpt the future of their society. On the economic front,
macroeconomic policies (2) wield influence over the general business environment, while
microeconomic policies (3), inclusive of cluster initiatives designed to optimize the functioning
of the microeconomic "engine," directly impact the diamond and clusters. Furthermore,
strategies formulated within firms and entrepreneurial activities (4) serve as proactive forces
that significantly contribute to shaping both clusters and society at large (Sölvell, Lindqvist, &
Ketels, 2003). This interconnected framework underscores the symbiotic relationship between
macroeconomic forces, microeconomic dynamics, and entrepreneurial endeavors in driving
national competitiveness.
Source: The Cluster Initiative Greenbook (modified version)
We move forth to understand the other essential component of the microeconomic aspect of
competitiveness – i.e., Related and Supporting Industries or the presence of clusters in the
next section.
General Business Environment
3
2
1
4 56
Clusters
Concept
Evolution
Cluster
Approach:
Unravelling
Divergences
in Adoption in
India
The role of clusters in enhancing the competitiveness at firm level (including MSMEs is
exceedingly important particularly in the current era of globalization. It was first mentioned
by Alfred Marshall, who laid the foundation for understanding the externalities within clusters
(Marshall, 1920). Post this various models, such as the Collective Efficiency Model (Schmitz,
1995), Flexible Specialization Model ,and Diamond Model (Porter M. E., Clusters and the New
Economies of Competition, 1998) were employed for the analysis of clusters (Neven & Dröge,
2001).
There are differences in each model: Piore and Sabel’s Flexible Specialization Model views
a cluster as an industrial district comprised of small enterprises engaged in a complex
network of competition and cooperation, emphasizing value creation, holistic approaches,
and the dynamic aspects of the cluster. Each model contributes unique insights, collectively
enriching the understanding of clusters in diverse contexts. In contrast, Schmitz’s Collective
Efficiency Model conceptualizes a cluster as a group of producers engaged in similar activities
in close proximity, focusing on factor conditions, demand conditions, externalities, joint action,
flexibility, economies of scope, innovation, and product differentiation. Whereas Porter’s
Diamond Model defines a cluster as a network of interconnected firms and institutions in
a specific field located within a particular geographical area, emphasizing firm strategy,
structure, rivalry, factor conditions, demand conditions, and related and supporting industries.
Out of all models, Porter’s definition of cluster has found extensive application in advanced
economies but has been notably overlooked in research on developing nations
7
.
While acknowledging the advantages, the Government of India
has initiated cluster-forming endeavours and devised strategies
to amplify this ecosystem’s scale for MSMEs. The Ministry of
Micro, Small and Medium Enterprises (MSME), Government of
India (GoI) has adopted the Cluster Development approach
as a key strategy for enhancing the productivity and
competitiveness as well as capacity building of Micro
and Small Enterprises (MSEs) and their collectives in
the country. 57
A cluster is a group of enterprises located
within an identifiable and as far as practicable,
contiguous area or a value chain that goes
beyond a geographical area and producing
same/similar products/complementary
products/services, which can be linked together
by common physical infrastructure facilities
that help address their common challenges.
The essential characteristics of enterprises in a
cluster are
The Ministry of Micro, Small and Medium Enterprises
(MSME) defines clusters as following
(a) Similarity or complementarity in the methods of production, quality
control & testing, energy consumption, pollution control, etc.,
(b) Similar level of technology & marketing strategies/practices,
(c) Similar channels for communication among the members of the cluster,
(d) Common market & skill needs and/or
(e) Common challenges & opportunities that the cluster faces.
The Indian definition outlined above, emphasises clusters as groups of enterprises facing similar
challenges, which could include common issues in production methods, quality control, marketing,
and infrastructure. It involves significant government intervention through the establishment of
SPVs and the allocation of grants to support the development of Common Facility Centers (CFCs).
The government is actively involved in planning and funding. The Indian definition of clusters
exhibits a closer alignment with the concepts of Collective Efficiency as proposed by Schmitz and
certain elements of Flexible Specialization articulated by Piore and Sabel, rather than adhering to
Porter's Diamond Model. The emphasis on enterprises situated within a discernible geographic
area engaged in the production of similar or complementary products/services, coupled with
the establishment of common physical infrastructure to address shared challenges, closely
corresponds to the principles of Collective Efficiency. This model underscores the importance
of collaboration and collective actions among firms within a cluster to enhance their overall
competitiveness.
Furthermore, the reference to Common Facility Centers (CFC) offering diverse facilities such
as processing, training, marketing, and raw material depots suggests a level of flexibility and
specialisation within the cluster. The concept of shared infrastructure capable of addressing various
needs of enterprises aligns with the fundamental tenets of Flexible Specialisation. 58
Porter’s
approach on
Clusters
Clusters are geographic concentrations of interconnected companies and institutions in a
particular field. Clusters encompass an array of linked industries and other entities important
to competition. Clusters also often extend downstream to channels and customers and
laterally to manufacturers of complementary products and companies in industries related
by skills, technologies, or common inputs (Porter M. E., Clusters and the New Economies of
Competition, 1998).
A cluster is the manifestation
of the diamond at work
Porter asserts that
- (Porter M. E., Clusters and the New
Economies of Competition, 1998)
Clusters exert a positive influence on competition in three
primary ways. Firstly, they enhance the productivity of firms
situated within the geographic confines of the cluster. Secondly,
they serve as catalysts for innovation, driving its direction and
pace, which underpins future growth in productivity. Lastly,
they stimulate the formation of new enterprises, contributing
to the cluster's expansion and reinforcement. Clusters make
opportunities for innovation more visible and make innovations
possible by aiding connections between stakeholders. (Porter
M. E., Clusters and the New Economies of Competition, 1998).
Reasserting Porter’s definition of clusters:
Clusters are not merely an agglomeration of firms
but rather a proximate group of interconnected
firms by commodities and complementarities.
- (Porter M. E., Clusters and the New Economies of Competition, 1998).
It is a dynamic framework that places a strong emphasis on value creation and the
enhancement of competitiveness (Neven & Dröge, 2001) . Moreover, a significant advantage
of the Porter model is that it does not assume an initial starting point nor an ideal to be strived
for (Neven & Dröge, 2001) ; instead, it proposes processes that make a cluster move from
one stage to another. These attributes of the diamond model have made it an effective and
widely adopted tool for the study of clusters nationally and internationally, especially SME
competitiveness.
The current interpretation of the Indian definition diverges from Porter's framework and the
globally accepted definition of clusters by developed economies like the U.S. and European Union. 59
Clusters are not just sectors – they capture the geographic footprint of economic activities,
not because they belong to the same statistical classification but because industries are
systematically related through local spillovers and linkages. Clusters that emerge around specific
factors and compete primarily on factor endowments tend to be shallow (Ketels, 2017). Porter
also highlights the role of natural clusters that arise without significant government intervention.
While government policies can influence clusters, the emphasis is on the organic development of
clusters driven by market forces. While the Indian definition does touch upon factors like common
challenges, it doesn't explicitly emphasize the determinants outlined in Porter's Diamond Model.
The Indian definition of clusters aligns more closely with the concepts of Collective Efficiency
(as proposed by Schmitz) and certain elements of Flexible Specialization (according to Piore
and Sabel), rather than adhering strictly to Porter's Diamond Model. However, users of these
models, whether directly or indirectly, often appear disjointed in their application, seeking
answers beyond the confines of the chosen framework and underscoring the need for a more
comprehensive approach. In this context, Porter's Diamond Model emerges as inherently superior,
with its foundational principles grounded in extensive research that spans various countries and
industries, providing a more robust and versatile framework for analysis. The consequence of a
narrow definition of clusters results in a myopic outlook, which undermines the growth potential
of these clusters and directly impacts their scalability and competitiveness.
In India, the Porter framework has not been tested to a great extent, but there are case studies
that have used it have affirmed its validity and called for more extensive applications of the model
in this setting. An examination of the Textile Cluster in Tirupur, also known as Textile hub of India
(Trivikram, Bhalla, Fraser, & Nicholson, 2011) indicates a prevalence of small enterprises and a
deficiency in brand equity. However, there has been an improvement in competitiveness observed
in Tirupur, as well as in other international knitwear clusters, after the termination of the Multi-
Fiber Agreement. Constraint-free access to primary materials (cotton) and robust Institutions for
Collaboration (IFCs) bolster the Tirupur cluster. The cluster is renowned for its capacity to fulfil
orders with short lead periods of two to four weeks and for the entrepreneurial spirit of its SME
members. Poor infrastructure support (in terms of electricity, ports, and roads), inadequate R&D,
pollution, and relatively high logistics costs plague the cluster. A Study of Andhra Pradesh Clusters
(Joshi, 2020) shows that the labour-intensive manufacturing sectors, like Food Processing and
textile and apparel, that currently build their competitiveness based on Government facilitation
need labour management and a change of orientation to cater towards global markets. Capital
as well as labour-intensive manufacturing sectors such as Minerals and Metals and Heavy
Engineering, which are already embedded into the national value chain, should undertake a
series of steps to elevate their competitiveness and integrate themselves into the global value
chain. A study (Jhamb, 2016) which utilised Porter's model to analyse the different determinants
of competitive advantage of the Sports Goods Cluster at Jalandhar concludes that the cluster
mainly depends on factor conditions, i.e., raw material availability and skilled labour. Along with
this, sophisticated customers, machinery suppliers and competitors enhance the cluster's growth.
The study suggests that the cluster should focus on developing specialised and advanced factors
and timely implementation of government policies to upgrade competitive advantage from
fundamental factors of production. These national and international studies reveal that specific
issues hindering growth within various industries can be discerned and effectively addressed
through cluster analysis using the diamond model.
 
Porter also
highlights the
role of natural
clusters that
arise without
significant
government
intervention. 60
Understanding
MSMEs
Chapter 3
competitiveness in
India using Clusters 61
GVCs serve as critical facilitators of the international exchange
of investment, knowledge, and managerial practices that are
in line with global standards, thereby significantly bolstering
domestic businesses
C
lusters play a vital role in enhancing the competitiveness of MSMEs, particularly
in the current era of globalisation. Various theoretical frameworks, such as flexible
specialization and collective efficiency, have been crafted to examine the dynamics
of clusters. Notably, one widely recognized paradigm, Porter’s diamond model, has
found extensive application in advanced economies but has been notably overlooked
in research on developing nations, especially in the context of India. This section of the
paper would critically evaluate the relevance and applicability of Porter’s cluster approach
for 5 sectors in India:
This is based on data sourced from the Periodic Labour Force Survey (PLFS), the
panorama benefits from extensive coverage of the Indian labour force, offering detailed
information on wages and employment within 5-digit National Industrial Classification
(NIC) industries at the district level. The data is aggregated into cluster categories,
formulated by aligning the 5-digit NIC codes with Benchmark Cluster Definitions initially
developed in the U.S. and subsequently applied in various other economies. This Indian
cluster database affords a comprehensive view of the overall configuration of the Indian
economy, the spatial distribution of specific cluster categories across the country, and
the cluster portfolios of each Indian district and state. The information derived from this
database is instrumental in identifying India’s prominent clusters, as well as evaluating the
robustness of cluster portfolios in different districts and states.
Automotive
Pharmaceutical and
Food Processing
Textile Manufacturing
Manufacturing
Clusters
Chemical 62
This methodology is based on India cluster panorama report. ( Kapoor, Ketels, Debroy, & Negi,
2023). The objective of this section of paper is to bridge the gap between these two realms
of literature, bringing attention to the untapped potential of Porter’s model in unravelling the
intricacies of clusters in countries like India.
Under-
standing
Cluster
approach
using PLFS &
Prowess data The cluster approach is employed to comprehensively understand the performance and
dynamics of Small and Medium Enterprises (SMEs) within the Indian economy. The UDYAM
portal data reveals that a significant proportion, specifically 81 percent, of MSMEs operate
as proprietorships, with 80 per cent falling into the Microenterprise category. Recognising
the prevalence of such ownership structures, it becomes crucial to analyse and assess the
performance of these enterprises collectively, which the cluster approach facilitates.
Performance
Comparison of
India’s MSMEs
with other
Countries.
Table: 2
Percentage
Organisation TypeMicro Small Medium
Proprietary98.67 1.28 0.05
Hindu Undivided Family97.42 2.41 0.17
Partnership90.00 9.28 0.72
Co-Operative97.54 1.97 0.48
Private Limited Company90.70 7.90 1.39
Public Limited Company91.64 5.80 2.56
Self Help Group99.87 0.12 0.01
Others99.78 0.20 0.02
Limited Liability Partnership 92.77 6.33 0.90
Society96.91 2.62 0.47
Trust96.47 2.79 0.73
Source: UDYAM (2020- jan 13 2025)
PLFS data contributes valuable insights by classifying proprietary and partnership enterprises
as part of the informal sector. PLFS is a household-level survey conducted by the National
Statistical Office (NSO) to assess India's labour market. It gathers data on employment,
demographics, industry, education, and wages. For our analysis, we use data from surveys
between 2017-18 and 2022-23, which cover annually both formal and informal economic
activities at the state and district levels. and is a longitudinal exercise. This categorisation is
pivotal in understanding the landscape within which a substantial portion of SMEs operates.
Specifically, the data indicates that 74.3 percent of workers engaged in proprietary and
partnership enterprises are involved in the non-agriculture sector. This information is
instrumental in comprehending the nature of employment within these enterprises and
highlights the significance of activities in informal sector. 63
NIC CodeDescriptionShare
10 Manufacture of food products18.58
13 Manufacture of textiles8.83
14 Manufacture of wearing apparel7.65
20 Manufacture of chemicals and chemical products 2.38
27 Manufacture of electrical equipment2.13
21
Manufacture of pharmaceuticals, medicinal
chemical and botanical products
0.90
29
Manufacture of motor vehicles, trailers and semi-
trailers
0.81
11 Manufacture of beverages0.87
30 Manufacture of other transport equipment0.59
Understanding SMEs' performance from PLFS data allows for a more nuanced analysis of their
contribution, employment patterns, and overall impact on the informal sector. This, in addition
to UDYAM data, can contribute to filling the gaps in understanding the MSMEs. Understanding
SME performance using PLFS data offers a holistic perspective on economic activity, aiding in
the formulation of cluster programmes, targeted strategies and policies to foster the growth
and sustainability of these enterprises.
When we look at formalisation of MSMEs in these manufacturing
sectors, we find that:
Source: UDYAM (2020- jan 13 2025)
The firm-level data utilized in this study is sourced from the Prowess database, which
is administered by the Centre for Monitoring the Indian Economy. Prowess aggregates
information predominantly derived from the income statements and balance sheets of publicly
listed companies. The database encompasses companies that collectively contribute to over
70 percent of the economic activity within the organized industrial sector of India. (Topalova,
2004)
To further gauge the value added by Micro, Small, and Medium Enterprises (MSMEs) across
various industries—food processing, manufacture of transport equipment, textile, chemical,
and pharmaceuticals—we leveraged firm-level data from the Centre for Monitoring Indian
Economy’s (CMIE) Prowess database. This database encompasses crucial information
extracted from profit and loss accounts and balance sheets of Indian enterprises to offer
insights into sales, investments, assets, and ownership type of firms. 64
CMIE
Prowess
database –
Methodology
Definition of Segments and
Value-Added Calculation
Identification of Enterprises
Step: 1
Step: 3
In the initial step of this analysis, segments for the computation of value added were identified
using the National Industrial Classification Codes. The chosen segments for this calculation
are outlined as follows:
Data Extraction
Step: 2
For the fiscal years 2014-2022, data extraction was performed, covering indicators such
as changes in stock, compensation to employees, insurance premiums, miscellaneous
expenditures, packaging costs, power/fuel/water charges, purchase of finished goods, raw
materials, rent/lease, repairs/maintenance, sales, and total income.
In the process of ‘Filtering and Identification Based on Sales Thresholds,’ a meticulous
approach was adopted to specifically delineate Micro, Small, and Medium Enterprises
(MSMEs). This involved the application of a discerning sales-based filter, isolating companies
NIC Division/
Group Code
NIC Name
101 Processing and preserving of meat
102 Processing and preserving of fish, crustaceans and molluscs
103 Processing and preserving of fruit and vegetables
104 Manufacture of vegetable and animal oils and fats
105 Manufacture of dairy products
106 Manufacture of grain mill products, starches and starch products
107 Manufacture of other food products
108 Manufacture of prepared animal feeds
110 Manufacture of beverages
13 Manufacture of textiles
14 Manufacture or wearable apparel
201
Manufacture of basic chemicals, fertilizer and nitrogen compounds, plastics
and synthetic rubber in primary forms
202 Manufacture of other chemical products
203 Manufacture of man-made fibres
29 Manufacture of motor vehicles, trailers and semi-trailers
30 Manufacture of other transport equipment 65
Data Cleaning
Value-Added Calculation and Analysis
Step: 4
Step: 5
To ensure data accuracy, firms with missing values on the aforementioned indicators were
systematically filtered out during the cleaning process.
The cost of intermediate consumption was computed by aggregating relevant expenses,
enabling the determination of value added (total income minus cost of intermediate
consumption) for each fiscal year. Subsequently, the year-on-year percentage increase in
value-added was calculated and visually presented, providing a comprehensive overview of
industry dynamics.
Limitations
The dataset's relatively small sample size may limit its representativeness of the
broader MSME landscape in India, as it predominantly includes firms adhering
to standardised bookkeeping practices. This exclusion may introduce potential
inaccuracies in assessing the true value added by diverse enterprises, especially
micro-enterprises that may not follow such practices.
Limited Sample Size:
with sales figures falling within the Rs.2500 million range. The primary objective of this
filter is to precisely identify and distinguish MSMEs from larger corporations. The analysis is
strategically tailored to concentrate on enterprises within the delineated MSME category by
implementing a defined sales threshold. This deliberate refinement enhances the precision of
the examination of MSMEs, allowing for a more nuanced understanding which distinguishes
MSMEs from larger corporations.
A significant number of missing values in the dataset poses a challenge to the
reliability and comprehensiveness of the analysis. The absence of data points may
result in gaps in crucial indicators, affecting the accuracy of value-added calculations.
This limitation underscores the need for cautious interpretation of findings.
The proprietary data collection methodology employed by the Centre for Monitoring
the Indian Economy (CMIE) may deviate from national and international standards.
This distinction should be considered in interpreting the analysis’s findings.
Missing Values:
Methodological Variations: 66
Cluster Level
Analysis 67
Textile Manufacturing
and Apparel
1.
The examination of both textile manufacturing and apparel clusters is indispensable
for obtaining a thorough comprehension of the textile sector’s multifaceted dynamics.
Delving into the textile manufacturing cluster offers insights into the initial stages of the
supply chain, encompassing processes like spinning, weaving, and fabric production.
This understanding is crucial for assessing the economic activity and trade dynamics
associated with raw material processing.
Conversely, examining the apparel cluster provides a holistic perspective on downstream
activities, from design to finished product, shedding light on value addition, employment
trends, and export earnings. Together, these analyses contribute to a nuanced
understanding of the sector’s global competitiveness, supply chain integration, and
aid in the formulation of targeted policies to foster sustainable growth and innovation
throughout the entire textile industry.
Value addition in Textiles Manufacturing and Apparel sector
The analysis of SMEs assessed showcases value addition within the textile manufacturing
sector, focusing on activities such as spinning, weaving, and finishing, the manufacturing
of other textiles, and the production of apparel. This reveals critical insights into the
sector's global dynamics spanning from 2014 to 2022.
GVCs serve as critical facilitators of the international exchange
of investment, knowledge, and managerial practices that are
in line with global standards, thereby significantly bolstering
domestic businesses 68
»The "Spinning, weaving, and finishing" sub-cluster appears dominant in terms of value
addition. A significant increase, particularly in 2022, shows that the 339 enterprises under
this NIC consistently exhibit higher value addition than other sub-clusters. However, the
dominance of "spinning, weaving, and finishing" is often considered an upstream activity
in the textile production process, potentially raising concerns due to lower value addition
compared to downstream activities.
»Conversely, the "Manufacturing of other textile " sub-cluster experienced fluctuations,
responsive to global economic conditions and market demand, with a notable increase in
2022 signifying potential resurgence amid changing market dynamics.
»In the context of the textile industry, downstream activities, such as the "Manufacture of
wearing apparel," involve creating final consumer goods with higher potential for value
addition. Concerns arise as the SMEs related to final manufacturing stages exhibits lower
value addition, indicating potential challenges for sector competitiveness in global value
chains.
Value addition in
firms with sale
<250 crores
Fig. 8
2014 2015 2016 2017 2018 2019 2020 2021 2022
Textile Manufacturing
Spinning, weaving
and finishing
Apparel Manufacture
of wearing apparel
Textile
Manufacturing
Manufacturing
of other textile
10000
0
20000
30000
40000
50000
Workforce Trends
0 1,00,000 2,00,000 3,00,000 4,00,000 5,00,000 6,00,000 7,00,000 8,00,000
Number of workers
₹ 0
₹ 50,000
₹ 100,000
₹ 150,000
₹ 200,000
₹ 250,000
₹ 300,000
₹ 350,000
₹ 400,000
₹ 450,000
₹ 500,000
Average wages
Mumbai Suburban
Raigarh
Ghaziabad
Chhindwara
Thane
Coimbatore
Hugli
Salem
Karur
Surat
Varan asi
Haora
Vellore
050,0001,00,000 1,50,0002,00,000 2,50,000
Number of workers
₹ 0
₹ 50,000
₹ 100,000
₹ 150,000
₹ 200,000
₹ 250,000
₹ 300,000
₹ 350,000
₹ 400,000
₹ 450,000
₹ 500,000
₹ 550,000
Average wages
Pune
Jalandhar
Rajkot
Morad abad
Hardwar
Jaipur
Mumbai Suburban
Thane
Indore
Tumkur
BangaloreCoimbatore
Ahmedabad
Surat
Thiruvallur
Kottay am
Haora
North Twenty Four Pargan as
Anantapur
Tiruvannamalai
Jammu
Textile Manufacturing Top 100 Districts Apparel- Top 100 DistrictsFig. 9 69
Textile Manufacturing
In 2022-23, the textile manufacturing cluster in India encompassed a workforce of 53 lakh,
reflecting a notable 15.86% reduction from the 63 lakh workers recorded in 2017-18. The
overall productivity of this cluster demonstrated only marginal increase of 1.16% over the six-
year period.
23%
A state-level analysis reveals that
exhibiting a workforce growth
more than 6 % since 2017-18.
Examination of the district-level distribution indicates that Surat in
Gujarat and Tirupur in Tamil Nadu have the highest average wages
and workforce participation within the cluster, capturing high total
workforce, respectively. On examining Gujarat, Surat demonstrates
a stark contrast with Ahmedabad in terms of workforce share and
average wages in gujarat, with the former accounting for 70% of the
workforce but displaying lower productivity than Ahmedabad.
Gujarat holds the highest share in the national textile workforce at
Contrastingly, Tamil Nadu and Uttar Pradesh experienced a decline in
their workforce shares during the same period.
A similar trend is observed in Uttar Pradesh, where Ghaziabad productivity is high but
constitutes less than of the total workforce of UP in textile, while Bareilly, with a 15.41%
workforce share, contributes merely 1.24% to the state’s average wage. This uneven trend
suggests specialized expertise in certain areas and lower output in others within these
states’ textile manufacturing clusters.
Apparel
In the fiscal year 2022-23, the apparel cluster in India engaged a workforce of approximately
19 lakh individuals, reflecting a decline of 13.42% in employment and a 9.07% decrease in
wages since 2017-18.
19.02%
Tamil Nadu emerged as the leading state with the highest
share in the workforce at
followed by West Bengal, Karnataka,
Maharashtra, and Punjab,
contributing 16.24%, 13.76%,
11.21%, and 7.759%, respectively. 70
Food Processing 2.
Value addition in the Food Processing Cluster
The analysis of value added in 433 enterprises across various NIC codes of 101-108 from
2014 to 2022 provides insights into the performance and trends within different activities. The
presence of both upstream and downstream activities highlights the interconnectedness of
the local and traded cluster, indicating that a disruption in one may affect the others.
Among these states, only West Bengal experienced an increase in the number of workers by
3.39%, followed by Gujarat with a 2.13% growth. Tamil Nadu also secured the highest share
in average wages at 12.80% in 2020-21, succeeded by Delhi and Karnataka with shares of
9.66% and 8.32%, respectively. Notably, West Bengal, ranking second in workforce share
among states, exhibited a nominal 2.93% share in total wages.
Conversely, Haryana, with a 0.39% workforce share, held a substantial 8.31% share in average
wages. In Tamil Nadu, Tirupur dominated with a remarkable 49.81% share in workforce,
experiencing an increase from 43.45% in 2017-18. However, subsequent districts, such as
Erode, Tiruvallur, and Coimbatore, displayed significantly lower workforce shares. The top five
positions in share of wages mirrored the workforce distribution, with Tirupur commanding
46.68%, followed by Coimbatore, Erode, and Tiruvallur. In Karnataka, Bangalore emerged with
the highest workforce share at 70.09%, yet its share in average wages was a modest 7.78%.
Conversely, Kolar and Hassan, with workforce shares of 0.57% and 0.73%, respectively, led
the state in average wages, emphasizing regional disparities in productivity within the apparel
cluster.
Value Added in Food
Processing with
sales < 250 crores
Fig. 10
Manufacture of
prepared animal feeds
Manufacture of other
food products
Manufacture of
grain mill products,
starches, and starch
products
Manufacture of
dairy products
Manufacture of
vegetable and
animal oils and fats 0
5000
10000
15000
20000
25000
30000
35000
40000
2014 2015 2016 2017 2018 2019 2020 2021 2022 71
Upstream Activities
»The NIC code 107, involving the manufacture of other food products, stands out with a
significant increase in value added over the years, especially in 2016 and 2020, showcasing a
robust growth trajectory.
»Conversely, Enterprises related to NIC code 108, i.e manufacture of prepared animal feeds,
experienced fluctuations, with a substantial decrease in 2020. The % increase in value added
indicates varying degrees of value addition across different enterprises.
»Enterprises associated with the NIC codes of upstream activities, such as the manufacture
of grain mill products, starches, and starch products (106) and the manufacture of
vegetable and animal oils and fats (104), show moderate and consistent growth. This
suggests a stable foundation for these industries, contributing significantly to the overall
value added.
»On the other hand, NIC code 105, enterprises encompassing the manufacture of dairy
products, displays a mixed performance, indicating potential challenges or changing market
dynamics.
Downstream Activities
Workforce Trends
»Enterprises in NIC codes 107 and 108 seem to be dominant, emphasising the importance of
processed food products. However, the fluctuations in value addition in enterprises under
NIC 108 since 2020 raise concerns about its resilience. This could be attributed to external
factors impacting the supply chain or market demand.
In the examination of the food processing sector, two distinct segments are under scrutiny:
Food Processing and Local Food and Beverages Distributions.
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
Number of workers
₹ 0
₹ 100,000
₹ 200,000
₹ 300,000
₹ 400,000
₹ 500,000
₹ 600,000
₹ 700,000
₹ 800,000
₹ 900,000
₹ 1,000,000
₹ 1,100,000
Average wages
Aurangabad
Gurgaon
29
Raigarh
Udaipur
Bangalore
Jind
Dhar
Nashik
Mumbai Suburban Ahmedabad
Sangrur
Nagpu r
ChittoorThane
KrishnaHugli
Indore
Haora
DarjilingRaisen
Buldana
0 50,0001,00,000 1,50,000 2,00,0002,50,000
Number of workers
₹ 0
₹ 50,000
₹ 100,000
₹ 150,000
₹ 200,000
₹ 250,000
₹ 300,000
₹ 350,000
₹ 400,000
Average wages
Pune
Kancheepuram
Aurangabad
29
Satara
Kolar
Jammu North West Delhi
Gurgaon
Chennai
Raigarh
Thane
Solan
Bangalore
CoimbatoreGhaziabad
Meerut
Ahmedabad
Kanpur Nagar
Krishna
Alwar
Bhopal
North Twenty Four Pargan as
Indore
South Twenty Four ParganasSalem
Surat
Guntur
RaisenLucknow
Anantapur
Raipur
Bastar
Bara Banki
Food Processing and ManufacturingLocal Food and Beverage processing and distributioFig. 11 72
43
The food processing and manufacturing cluster
in India engaged approximately
Lakh workers
in 2020-21,
experiencing a notable 16% increase in average wages since 2017-18.
11.65% 10.22%.
»Uttar Pradesh emerged as the leading state, boasting the
highest share in both workforce and wages for this cluster at
Maharashtra, Tamil Nadu, West Bengal, and Rajasthan followed with shares of 10.26%,
9.02%, 8.97%, and 7.59% in workforce, respectively. Notably, with the exception of Ladakh,
Mizoram, and Sikkim, all states demonstrated activity in the food processing sector, with
lower participation in Lakshadweep, Meghalaya, Chandigarh, and Daman and Diu. &
»Punjab, despite contributing a modest 3.98% to the workforce, commanded a 5.54% share in
average wages, while West Bengal, with an 8.9% workforce share, only held a 3.35% share in
average wages.
Upstream Activities
»Uttar Pradesh continued to dominate with a 15.12% share in workforce and a 9.85% share
in average wages. Maharashtra, West Bengal, and Bihar followed with shares of 8.45%, 7.9%,
and 7.5% in workforce, respectively. Notably, despite having lower workforce shares (4.99%
and 4.38%), Madhya Pradesh and Rajasthan made substantial contributions to average
wages, with shares of 5.82% and 5.4%, respectively. West Bengal, with a high workforce
share of 7.9%, held a comparatively low share of 2.41% in total average wages for the cluster.
»Whereas, delving into the food processing and manufacturing cluster in Uttar Pradesh, a
notable 11.78% increase in the workforce and a substantial 34.61% increase in total wages
were observed in 2020-21 compared to 2017-18. The cluster displayed a dispersed pattern
across districts of Uttar Pradesh, lacking significant specialization.
»Notably, Ghaziabad, Varanasi, Sitapur, and Balarampur covered the highest share in wages,
while Shahjahanpur, Pilibhit, Kapur Nagar, and Jhansi contributed the most to the workforce.
This lack of concentrated specialisation may be attributed to the state’s large size and
population.
»Similarly, in Maharashtra, districts such as Pune, Sangli, Kolhapur, and Nashik held
substantial shares in the workforce, with Pune leading at 14.50%. However, their shares in
average wages were slightly lower, indicating a disparity in productivity. Mumbai Suburban, 73
with a 9.91% share in wages, employed only 3.57% of the workforce in the food processing
cluster. Thane contributed 5.82% to total wages with a 4.91% share in the workforce.
Despite Pune having the highest workforce share, its contribution to wages was only 4.55%.
This trend was also observed in other districts, suggesting a nuanced relationship between
workforce distribution and wage contribution in Maharashtra’s food processing sector.
Chemical Products
3.
Value addition in the chemical sector
The comprehensive analysis of value addition in the Chemicals
sector from 2014 to 2022 takes into account the specific
distribution of enterprises within cluster . Out of the
total 1512 enterprises assessed, the manufacture of
basic chemicals, fertilizer and nitrogen compounds,
plastics, and synthetic rubber in primary forms
constitutes 48%, highlighting its substantial
presence in the industry. The steady and
remarkable increase in value addition in this sub-
cluster underscores its dominant role, particularly
in upstream activities. Similarly, the manufacture
of other chemical products, representing 49% of
the assessed enterprises, displays consistent growth,
especially in 2022, indicating the
prominence of downstream activities. The manufacture of man-made
fibres, although comprising 3% of the enterprises, exhibits noteworthy fluctuations and an
overall positive trend, emphasizing the need for careful consideration in the analysis.
49%
48%
3%
basic chemicals,
fertilizer and nitrogen
compounds, plastics,
and synthetic rubber
Other Chemical
products
Basic man-made
fibres
Value added in
upstream and
downstream
activities of
chemical cluster
with sales < 250
crores
Fig. 12
0
200000
400000
600000
800000
Rs. millions
1000000
1200000
1400000
1600000
1800000
2014 2015 2016 2017 2018 2019 2020 2021 2022
Manufacture of
basic chemicals,
fertilizer and nitrogen
compounds, plastics
and synthetic rubber
in primary forms
Manufacture of other
chemical products
Manufacture of
man-made fibres 74
In light of these insights, the Chemicals sector portrays a dynamic landscape where both
upstream and downstream activities coexist and contribute significantly to the overall value
addition. The dominance of basic chemical production, coupled with the growth in other
chemical products, highlights the sector's adaptability and competitiveness. The relatively
smaller share of enterprises involved in the manufacture of man-made fibres suggests a
specialized niche within the industry, warranting focused attention in understanding its unique
dynamics. This nuanced analysis underscores the importance of considering the diverse
composition of enterprises when evaluating the performance and trends within the Chemicals
sector.
Workforce Trends
In the fiscal year 2022-23, the chemical industry in India was analyzed across two distinct
clusters: upstream chemical and downstream chemical. The cumulative workforce within
these clusters amounted to approximately 8.4 lakh workers, constituting 0.34% of the total
payroll across all clusters.
In the downstream chemical cluster
»Virudhunagar in Tamil Nadu emerged as the district with the highest workforce share at
16.31%, followed by Thane in Maharashtra (7.83%), Bharuch (6.36%), and Valsad (4.73%)
in Gujarat. Notably, these districts witnessed substantial increases in workforce shares
compared to 2017-18.
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
Number of workers
₹ 0
₹ 100,000
₹ 200,000
₹ 300,000
₹ 400,000
₹ 500,000
₹ 600,000
₹ 700,000
₹ 800,000
₹ 900,000
₹ 1,000,000
₹ 1,100,000
Average wages
Aurangabad
Gurgaon
29
Raigarh
Udaipur
Bangalore
Jind
Dhar
Nashik
Mumbai Suburban Ahmedabad
Sangrur
Nagpu r
ChittoorThane
KrishnaHugli
Indore
Haora
DarjilingRaisen
Buldana
0 50,0001,00,000 1,50,000 2,00,0002,50,000
Number of workers
₹ 0
₹ 50,000
₹ 100,000
₹ 150,000
₹ 200,000
₹ 250,000
₹ 300,000
₹ 350,000
₹ 400,000
Average wages
Pune
Kancheepuram
Aurangabad
29
Satara
Kolar
Jammu North West Delhi
Gurgaon
Chennai
Raigarh
Thane
Solan
Bangalore
CoimbatoreGhaziabad
Meerut
Ahmedabad
Kanpur Nagar
Krishna
Alwar
Bhopal
North Twenty Four Pargan as
Indore
South Twenty Four ParganasSalem
Surat
Guntur
RaisenLucknow
Anantapur
Raipur
Bastar
Bara Banki
Top 100 Districts - Downstream
Chemical Clusters
Top 100 Districts - Upstream Chemical ClusterFig. 13 75
In the upstream chemical cluster
»Thane and Bharuch again emerged as the leading districts with 10.17% and 8.90% shares
in the workforce, respectively. Gujarat maintained the highest state-level share in the
workforce (27%) and average wage (14.45%) for upstream chemical clusters, despite
experiencing declines in both workforce and average wages from 2017-18 to 2020-21.
Maharashtra, Jharkhand, and Tamil Nadu followed suit in terms of state-level shares.
»Gujarat’s nine districts with upstream chemical clusters exhibited varying workforce and
average wage shares. Bharuch led with 32.89% in workforce and 17.27% in average wages,
while Vadodara contributed 25.06% to the workforce and 8.27% to average wages. Kheda
experienced a notable increase from 0.5% to 9.6% in workforce share and from almost 0% to
17.48% in average wage share from 2017-18 to 2020-21.
»Jharkhand, with three districts in the upstream chemical cluster, witnessed Purbi Singhbum
commanding the highest workforce share at 81.25%, while Sarai Kela-Kharsawan exhibited
a noteworthy 76.87% share in average wages with an 8.05% workforce contribution. Ranchi
contributed 10.70% to the workforce and 13.48% to average wages. The state exhibited
growth in both workforce and average wages shares from 2017-18, indicating the evolving
landscape of chemical clusters.
Automotive
4.
Value addition in Automotive Sector
The examination of value added by 327 enterprises with yearly sales less than 250 crore,
covering the period from 2014 to 2022, provides crucial insights into the automotive industry's
performance:
»The steady and continuous growth observed between 2014 and 2017 indicates a resilient
and expanding automotive industry throughout this time period. However, a notable
contraction occurred in 2018, characterised by a decline of 10.81%. This decline suggests
that the industry may have faced potential challenges or disruptions during that particular
fiscal period. The aforementioned negative trajectory continued into 2019 and 2020, during
which it experienced additional declines of 7.17% and 14.09%, respectively. These figures
seemingly arose from the influence of wider economic conditions, global trends, and sector-
specific obstacles.
»Mysore, Karnataka, claimed the highest share in average wages at 11.78%, despite having a
modest 1.96% share in the workforce. Conversely, districts with high workforce shares, such
as Virudhunagar, exhibited lower shares in average wages (0.30%). Gujarat, Tamil Nadu, and
Maharashtra dominated in terms of both workforce and average wage shares at the state
level. 76
Workforce Trends
The automotive sector in India employed an estimated 14 lakh workers during 2022-23.
Despite an 18% increase in the total workforce from 2017-18, there was a noteworthy
14% decrease in the overall wages within the cluster during the same period. District-level
analysis revealed distinct patterns, with Bokaro, Nagpur, Mysore, Gurgaon, and Southwest
Delhi exhibiting the higher productivity with a comparatively lower share in the workforce.
In contrast, Pune, Ahmedabad, Kolhapur, Rewari, and Tiruvallur have the highest workforce
share but lower productivity.
Within the automotive sector, Maharashtra maintained its preeminent position by securing
the highest share in average wages at 17.67%, followed sequentially by Tamil Nadu, Gujarat,
Jharkhand, and Haryana.
»A significant recovery emerged within the automotive industry in 2021, marked by a
value-added growth of 18.5%. The observed resurgence may indicate effective industry
adjustments, recuperation from previous obstacles, or an improved market environment.
The positive trajectory of expansion continued through 2022, reaching its pinnacle with a
value-added of 55,892.8, surpassing the levels recorded in 2020.
Value addition in
automotive sector
with sales <250 crores
Fig. 14
0
10000
20000
30000
40000
50000
60000
70000
80000
Rs. millions
2014 2015 2016 2017 2018 2019 2020 2021 2022 77
Further, the analysis of districts in Maharashtra
indicated varied dynamics, with Pune leading
in workforce share (48.59%) but having a
relatively low productivity as its average wage
share in Maharashtra is just 7.8%. Whereas,
in Tamil Nadu, Tiruvallur held the highest
share in both workforce (23.57%) and average
wages (11.27%). Gujarat showcased a diverse
landscape, with Ahmedabad leading in
workforce share (69.41%) and Mehsana leading
in average wage share (16.59%). The intricacies
of these trends underscore the need for
nuanced strategies in the automotive industry,
taking into account regional variations in
workforce distribution and average wages.
Automotive-
Top 100 District
Fig. 15
0 20,000 40,000 60,000 80,000 1,00,0001,20,0001,40,0001,60,0001,80,000
Number of workers
₹ 0
₹ 50,000
₹ 100,000
₹ 150,000
₹ 200,000
₹ 250,000
₹ 300,000
₹ 350,000
₹ 400,000
₹ 450,000
₹ 500,000
₹ 550,000
₹ 600,000
Average wages
Sonipat
Pune
Kancheepuram
Ernakulam
Krishnagiri
Chennai
Baghpat
North Twenty Four Parganas
IndoreThane
Raigarh
Gautam Buddha Nagar
Mumbai Suburban
Kachchh
Tumkur
Bangalore
ThiruvallurSatara
Nashik
Mahesana
Bara Banki
South Twenty Four Pargan asMadurai
Sabar Kantha
Nagapatt inam 78
Policies for MSMEs
Chapter 4
in India 79
In this chapter, we delve into a comprehensive analysis of the policy landscape governing
Micro, Small, and Medium Enterprises (MSMEs) in India, aiming to augment our
understanding of the challenges faced by these enterprises. While our analysis discerns
the relevance of the objectives outlined in these policies, it also sheds light on areas
where policy implementation can be refined, emphasizing the imperative for heightened
sustainability.
In the next step, we broaden our perspective to encompass the schemes and initiatives
implemented by various state governments in India, thereby creating a more detailed
depiction of the decentralised policy ecosystem. Our investigation uncovers a certain
disjointedness in state-level policies, indicative of a lack of uniformity and synchronised
efforts across regions. This revelation underscores the necessity for a more cohesive
and coordinated approach among states to fortify the collective impact of MSME
policies. As we traverse through this chapter, we endeavour to unravel the intricacies
of these policies, offering insights into their effectiveness, collaborative potential, and
opportunities for refinement to foster a more conducive environment for the flourishing
MSME sector in India.
Porter highlights the importance of building microeconomic
capabilities in the national business environment where firms
compete, without which the broader macro-framework would
not bear fruit . This understanding is especially significant in
the Indian business scenario which harbours a majority of small
enterprises.
Evaluation
of National-
Level
Policies for
MSMEs in
India
The enactment of the MSMED Act in 2006 marked a pivotal milestone in creating a
conducive policy framework for advancing the MSME sector in India. This legislation not
only provided a definitive classification for MSMEs as opposed to the previous “Small
Scale Industries” but also established a foundation for bolstering their competitiveness.
Before this Act, small industries in India were referred to as Small Scale Industries (SSIs)
under the Industrial Development and Regulation (IDR) Act of 1951
9
, which encompassed
tiny, cottage, traditional, and village enterprises. The MSMED Act of 2006 established
a legal framework, defining the concept of an ‘enterprise’ to include manufacturing
and service entities and categorising them into three tiers: Micro, Small, and Medium.
The classification of MSMEs varies globally, relying on diverse factors like turnover,
workforce size, and investment.
9
https://www.dcmsme.gov.in/publications/circulars/circularmay1994.html 80
In India, historically, the definition was contingent on the number of employees as per the
Industrial Development and Regulation (IDR) Act of 1951. However, due to challenges in
obtaining accurate employment data and the fact that most enterprises in India are Own
Account Enterprises, informal, and/or employ very few labourers due to the complexity in labour
laws (Khatri, A Study of the Challenges of the Indian MSME Sector, 2019), the focus shifted
to using investments in plant, machinery, and equipment as a reliable proxy. Recently, there
has been a shift towards a turnover-based definition due to issues with data reliability and to
account for depreciation in the definition on the basis of plant and machinery. The original
investment-based criteria set in 2006 doesn’t fully align with the present cost index of plant and
machinery (Sinha U. K., 2019). Additionally, many MSMEs operate informally, without proper
accounting practices, making it challenging for them to fit within the current definition criteria,
highlighting the necessity for periodic adjustments in line with evolving economic conditions. As
a move to overcome these shortcomings, in July 2020, the Ministry of Micro, Small and Medium
Enterprises revised the definition of MSMEs to take into account the changing circumstances by
giving primacy to the classification on the basis of turnover rather than investment in plant and
machinery
10
. Given the changing circumstances, it’s crucial to shift the focus of this important
legislation towards making it easier for MSMEs to operate in the market. The goal is to tackle key
challenges like limited infrastructure, informal practices, adopting new technologies, building
capacity, establishing market linkages, accessing credit, and securing investment.
Both the Government of India and state governments have been proactive in introducing
many schemes and policies to bolster this sector. Yet, MSMEs continue to grapple with issues
concerning formalisation, access to technology, timely and adequate financial support,
enhancement of competitiveness, availability of skilled workforce, and market linkages. India has
a range of institutions dedicated to addressing the challenges faced by MSMEs. The Ministry of
MSME oversees policy formulation for its holistic advancement, and various organisations under
the Office of Development Commissioner MSME execute these policies. The MSMED Act of 2006
encompasses provisions to promote and nurture the MSME sector. SIDBI serves as the principal
financial institution supporting MSME financing and development. RBI and SEBI establish
overarching policies to facilitate financial backing for the sector. While these bodies have played
a crucial role through legislation and policies in driving sectoral growth, crafting targeted
policies in areas such as infrastructure, formalisation, technology integration, linkages, credit
accessibility, and prompt payments to MSMEs, and ensuring their effective implementation, has
proven to be a challenge for all stakeholders.
This section aims to assess the execution of the measures brought about at the national level
to uplift MSMEs. The evaluation of the schemes under consideration is grounded in a multi-
dimensional approach, drawing from a combination of audit reports by the Comptroller and
Auditor General of India (CAG), annual reports by the implementation authorities of the schemes,
and existing academic literature. The success of any scheme can be gauged by the physical
and financial progress carried out under the scheme, as well as its socio-economic impact. This
information is made available by the CAG of India in their annual audit reports. These reports
were leveraged as a critical source of evidence. Additionally, a review of academic literature
pertaining to the schemes for the MSME sector in India was conducted. The literature review
served to contextualise the evaluation within the broader academic discourse, providing
empirical insights and comparative analyses with schemes of peer economies.
10
Revised Classification of MSMEs w.e.f 1st July 2020
Both the
Government of
India and state
governments
have been
proactive in
introducing
many schemes
and policies
to bolster this
sector. 81
Examination
of Key
policies
designed
to assist
MSMEs Credit Guarantees Trust
for MSMEs
1.
Financial inclusion for MSMEs is imperative for economic growth. However, the persistent
credit gap excludes them from India’s formal financial institutions. A significant reason for the
limited access to bank financing in this industry is the banks’ perception of high risk when
lending to micro and small enterprises (MSEs). The challenge of providing collateral, especially
for very small businesses seeking small loans and first-generation entrepreneurs, makes it
harder for them to access finance for their enterprise. (Ministry of Micro, Small & Medium
Enterprises)
In response, the Ministry of Micro, Small, and Medium Enterprises, in collaboration with the
Small Industries Development Bank of India (SIDBI), established the Credit Guarantee Fund
Trust for Micro and Small Enterprises (CGTMSE) in 2000. The main objective was to offer
a collateral-free guarantee for loans and advances, which include term loans and working
capital assistance, provided by lending institutions to both new and existing Micro and Small
Enterprises. Additionally, lending institutions are required to pay guarantee fees, annual
service fees, and other charges as determined by the Government of India and SIDBI (About
CGTMSE, 2023).
Credit Guarantee Scheme for Banks (CGS-I):
Credit Guarantee Scheme for NBFCs (CGS-II):
Credit Guarantee Scheme for Subordinate Debt (CGSSD):
Credit Guarantee Scheme for PM SVANidhi (CGS-PMS):
Credit Guarantee Scheme for Co-Lending (CGSCL):
The scheme provides credit guarantees of up to ₹5 crore for unsecured loans to MSMEs. This
includes special benefits for certain groups, such as women, SC/ST entrepreneurs, and those
in aspirational districts. A ‘Hybrid Security Model’ is available for partially collateralised loans.
It was launched in 2017 to help NBFCs provide easier access to credit
for MSMEs.
The Scheme, launched in June 2020, provided credit to stressed MSMEs. It ended on March
31, 2023. The aim was to help MSME promoters infuse funds into their businesses through
equity, quasi-equity, or sub-debt.
This scheme was launched to help street vendors affected by the COVID-19 pandemic. It
provided working capital loans and encouraged them to formalise their businesses and adopt
digital payments.
The RBI introduced the co-lending model, which aims to improve credit access for
underserved sectors. It combines the lower cost of funds from banks with the wider reach of
NBFCs. The CGTMSE launched the CGSCL in February 2022 to further support this model,
providing guarantee coverage for loans extended jointly by banks and NBFCs.
CGTMSE has five schemes under its umbrella: 82
In the last five years, from 2018-19 to 2022-23, the number of approved guarantees has
increased significantly, with 2022-23 reaching 11,65,786 approvals, a substantial rise from
4,35,520 in 2018-19 at a CAGR of 27.91%. The guarantee amount has shown consistent
growth, especially a sharp rise in 2022-23 to ₹1,06,474 crore, almost doubling the previous
year's amount of ₹55,218 crore. The dip observed in the above graph in 2020-21 can be
attributed to the Covid-19 pandemic. The sharp increase starting 2021-22 perhaps resulted
from the launch of PM SVANidhi Scheme.
Additionally, the CGTMSE’s average loan size peaked in 2022-23 at ₹8,98,801, the highest in
the last five years, rising from ₹6,92,689 in 2018-19 at a CAGR of 6.73%.
Approved
Guarantees
and Amount by
CGTMSE
Average size of
Loans approved
by CGTMSE
Fig. 16
Fig. 17
₹ 0.00
0
₹ 1,00,000
200000
₹ 2,00,000
400000
₹ 3,00,000
600000
₹ 4,00,000
800000
₹ 5,00,000
1000000
₹ 6,00,000
1200000
₹ 7,00,000
1400000
₹ 8,00,000
₹ 9,00,000
₹ 10,00,000
2018-19
2018-19
2019-20
2019-20
2020-21
2020-21
2021-22
2021-22
2022-23
2022-23 83
Issues in the Scheme
This concern remained in the committee’s 68th report about “Action taken by the Government
on the Observations/Recommendations contained in the Forty-Sixth Report (17th Lok Sabha)
on the subject ‘Strengthening Credit Flows to the MSME Sector”.
The CGTMSE, operating as a registered trust, relies on a 4:1 ratio of contributions from the
Government of India and SIDBI to its corpus fund. Member Lending Institutions (MLIs) must
register and form a formal agreement with CGTMSE to access guarantees for MSE credit. MLIs
include commercial banks that enter into an agreement CGTMSE and can apply guarantee
cover in respect of eligible credit facility sanctioned to any eligible borrower
11
. However,
procedural inefficiencies are evident.
These issues affect both the institutions and the MSMEs they serve. Institutions struggle with
a lack of regulatory support and procedural consistency, leading to resource misallocation.
Operational challenges include accountability lapses, delayed settlements, and a slow claim
process.
“Strengthening Credit Flows to the MSME Sector”, it was highlighted
In the 46th report of the Standing Committee on Finance (17th Lok Sabha) titled
that only a few MSME enterprises are
managing to get collateral-free loans under
the Government schemes, with majority being
compelled to furnish adequate collateral even
after being eligible for collateral-free loans. As
more than 99 percent of the MSMEs belong
to the micro sector they typically have no
collateral to offer to banks.
11
https://www.cgtmse.in/Home/VS/94 84
For MSMEs, the burden of high guarantee fees on top of already significant interest
rates makes accessing the scheme costly. Recognising these challenges, experts have
recommended increasing the guarantee cover, absorbing guarantee fees, streamlining
procedures, and offering truly collateral-free loans under certain conditions. Responding to
this, a restructured CGTMSE scheme was introduced in April 2023, with a notable ₹9,000
crore boost from the Union Budget FY 2023-24 to guarantee an additional ₹2 lakh crore for
MSEs. The scheme’s updates include halving the guarantee fees for loans up to ₹1 crore
and reducing the minimum fee to 0.37% annually. The guarantee cap has been raised from
₹2 crore to ₹5 crore, and the threshold for claim settlements without legal action has been
increased to ₹10 lakh. ((Mund, 2020) (Anu & Lakshmisree, 2013; Anu & Lakshmisree, 2013)).
MSMEs also face NPA challenges, as RBI’s classification criteria (principal or interest payment
remained overdue for 90 days) doesn’t align with the sector’s working capital cycle. Extending
the classification period to 180 days, which takes into consideration the enterprise’s payment
abilities and allows restructuring without downgrading accounts, can provide breathing space
for MSMEs
12
.
For CGTMSE to effectively address credit access challenges, a comprehensive policy
framework with robust checks and balances is essential, enabling both borrowers and lenders
to fully utilise the credit system.
Key Takeaways from other countries
In many developing nations in Asia and the Pacific, the credit system is mainly centred
around banks, with nonbank financial institutions playing a minor role. The lack of credit
infrastructure, such as credit and collateral registries, contributes to information imbalances
that hinder credit access (Asian Development Bank, 2022).
In Asia’s developing countries, the primary institutional credit mechanism is Credit Guarantee
Schemes (CGSs), which have effectively addressed information imbalances and expanded
credit access for SMEs. These schemes share the default risk with financial institutions,
allowing SMEs to navigate traditional credit assessments and institutional preferences.
When comparing India’s CGTMSE with similar schemes in other countries like Korea’s KODIT,
Japan’s JFC, Malaysia’s CGCM, and Indonesia’s PUJKI, it’s evident that India’s CGTMSE has
a smaller corpus or fund size. This smaller corpus has also increased at a slow pace and
selective provision of services by the Indian CGS. Some of these schemes have evolved
into credit information bureaus, providing SMEs with reliable risk assessments, along with
provision of services that facilitate access to finance and ensure efficient operations with
strong risk management practices. In contrast, CGTMSE lacks additional support services for
MSMEs and has limited direct interaction with them. (Asian Development Bank, 2022)
In Asia’s
developing
countries,
the primary
institutional
credit
mechanism
is Credit
Guarantee
Schemes
(CGSs), which
have effectively
addressed
information
imbalances and
expanded credit
access for
SMEs. 85
These restrictions hinder the competitiveness of Indian MSMEs despite their proportion in
the economy. The competitiveness of MSMEs extends beyond credit access; it encompasses
the entire credit utilisation process. Recognising and improving services related to credit
access, ensuring efficient resource allocation at the enterprise, government, and institutional
levels, and creating an enabling environment based on ground-level challenges is crucial. This
approach, focused on aiding sound financial decision-making and risk mitigation rather than
merely offering access to a select group of formalised MSMEs, can significantly amplify the
scheme’s impact.
This approach,
focused on
aiding sound
financial
decision-
making and risk
mitigation rather
than merely
offering access
to a select group
of formalised
MSMEs, can
significantly
amplify the
scheme’s
impact.
Assistance to Training
Institutions Scheme
2.
The Assistance to Training Institutions Scheme, overseen by the Ministry of Micro, Small
and Medium Enterprises, Government of India, is a centrally sponsored initiative. It extends
financial aid to training institutions, aiming to enhance skill development within the MSME
sector. The scheme's primary objectives encompass upgrading training infrastructure, creating
and delivering innovative programs, and imparting skills to a significant number of individuals
for the MSME sector's benefit (Invest India, 2023).
87%
Under this programme, it was found that from 2012-13 to 2019-20,
of the allocated 17,615 training
programs were completed,
training approximately 87% of the target of 4.7 lakh persons.
However, investigation into the scheme's performance by the CAG audit (Comptroller and
Auditor General of India, 2021) reveals several critical aspects of the training programs under
review.
»Assigning training programs to unauthorized agencies and setting training targets for
institutions without considering their capacity and staff strength led to overburdened staff and
inefficient training.
»The Ministry neglected to assess the necessary skills before designing skill development
programs.
»The Ministry's sanction orders failed to establish targets for training institutes regarding
indigenous entrepreneurship, wage employment, or trainee self-employment. There was an
absence of post-training employment or entrepreneurship targets and monitoring mechanisms.
»Invoices and a number of completed trainings were fabricated. About 70% of the recorded
trainees were legitimate, with instances of duplicate and unclear duplicate trainees. The
unutilised training funds were neither reported to the Ministry nor returned by the institutions,
highlighting a lack of transparency and accountability in financial management 86
The Ministry failed to realise the intended results of the schemes primarily due to the absence
of a proper assessment of necessary skills, skill gaps, and the trade-offs involved in conducting
these trainings. Additionally, there were no requirements set by the Ministry for training
institutions to ensure the employability of trainees and guarantee the desired outcomes of the
training programs.
The scheme's incapacity to effectively address a fundamental skilling issue discourages
enterprises from engaging in government programs. This, in turn, deprives them of affordable
and relevant training opportunities, forcing them to rely on costly upskilling courses that are
hard to access. This obstacle significantly hampers the scalability and competitiveness of
MSMEs.
Public Procurement Policy
2012, for Micro and Small
Enterprises
3.
The Public Procurement Policy for Micro, Small, and Medium Enterprises (MSMEs) in India
mandates that central government ministries and departments should procure at least
25% of their annual goods and services from MSMEs, with an additional 4% from MSMEs
owned by Scheduled Castes and Scheduled Tribes. The fundamental motive of this Policy
is to advance and develop Micro and Small Enterprises by aiding them in marketing their
products and services. The primary objectives are to foster the growth of MSMEs, enhance
their participation in public procurement, and ensure equitable opportunities for them. These
objectives rely on principles of competitiveness, adherence to sound procurement practices,
and the execution of supplies in accordance with a system that is fair, transparent, competitive,
and cost-effective. To promote greater involvement of MSEs in government procurement,
Central Public Sector Enterprises (CPSEs) are encouraged to conduct Vendor Development
Programmes or Buyer-Seller Meets, particularly for SC/ST entrepreneurs (Public Procurement
Policy, 2016)
13
.
The CAG Audit (Comptroller and Auditor General of India, 2018) encompassing various
procurement practices and compliance within the Central Public Sector Enterprises found
that there have been shortcomings in procurement targets and compliance, payment issues to
vendors, outstanding dues, billing practices, and conducting vendor development programs.
This necessitates a need for stronger regulations, better financial management, transparency
in transactions and clearer policy communication and enforcement mechanisms. The handling
of complaints and grievances also raised concerns. While complaints were received, it was
found that they were not adequately processed through the grievance cell. Furthermore,
the outcomes of these complaints were not updated on the portal, indicating a lack of
transparency and accountability in addressing vendor concerns. Nodal officers, important for
coordination and communication not appointed by all CPSEs. The website was rarely updated
with procurement plans or updates.
13
Evidence to support achievements of participation in Vender Development Programmes could not be furnished
hence the successful execution for the same cannot be verified (https://msme.gov.in/sites/default/files/Vendor_
Development_Programme_Ancillarisation.pdf)
The primary
objectives
are to foster
the growth
of MSMEs,
enhance their
participation
in public
procurement,
and ensure
equitable
opportunities
for them. 87
Micro and Small Enterprises:
Cluster Development Programme (MSE-CDP)
3.
This highlights India’s challenges related to the capacity of policy administration, leading to
significant issues and uncertainties in the implementation of SME support measures. Along with
this, anti-competitive practices like corruption meddle with schemes like public procurement in
India leading to artificial inflation in prices (Patil, 2017) . In a nation where the missing middle
persists with a missing small as well, these schemes are crucial as they offer opportunities for
such enterprises to engage in the market. The inefficiency in these programs not only hampers
competition among existing enterprises by restricting diversity and inadvertently favouring
larger businesses, but it also establishes obstacles to the entry of new and emerging small
businesses.
14
A Common Facility Centre (CFC) is defined as an infrastructural
hub for processing, training, marketing, raw material depot,
effluent treatment, complementary production processes, testing
laboratory, and ancillary activities for MSMEs (https://msme.gov.
in/sites/default/files/ModifiedGuidelinesofMSE_0.pdf)
15
A Special Purpose Vehicle (SPV) is a company registered under
Section 8 of Companies Act set up for the purpose of running
projects under MSE-CDP. A company registered under
Section 8 of the Companies Act is a non-profit organization
with limited liability that aims to promote charitable
activities, art, science, education, and sports. (https://
msme.gov.in/sites/default/files/FAQs-MSE-CDP.pdf, https://
www.icsi.edu/media/webmodules/publications/FAQs_on_
Section_8_Companies.pdf)
MSME Cluster Development is a program of the Government of India that aims to promote the
growth and development of MSMEs by developing and upgrading their clusters. The objective
of the scheme is to enhance the productivity and competitiveness of Micro and Small
Enterprises (MSEs) for their holistic development. This involves providing financial assistance
in the form of a Government of India (GoI) grant to establish Common Facility Centres (CFCs)
14

provide shared services to enterprises in existing clusters and for upgrading or establishing
new Industrial Areas, Estates, and Flatted Factory Complexes. The scheme also involved the
establishment of a Special Purpose Vehicle (SPV)
15
to leverage resources, enhance access to
public resources, and improve linkages to credit and marketing competitiveness (Comptroller
and Auditor General of India, 2021).
Applying for the MSE-CDP consists of a ten-step procedure according
to the recently revised guidelines (Ministry of MSME). Such a
complicated procedure may prove to be a hindrance and beyond
the scope of the limited capabilities of Micro- and Small-
Enterprises. Additionally, the project approval process
requires the applicants to produce multiple documents,
including a project appraisal report and registered land
documents, thus increasing the compliance burden
on the enterprises. According to the newly released
guidelines in 2022, the digital portal for the scheme
would be revamped to include photographs of
ongoing projects, a map of clusters across India, 88
workflow of the scheme, and proposals to ensure transparency among applicants (Ministry of
MSME, 2022). An inspection of the portal revealed that the aforementioned updates had not
been made since the inception of the new guidelines in 2022. Furthermore, the guidelines
indicate that UDYAM Data on detailed NIC Classification and PIN Codes of registered
enterprises have been used to formulate detailed cluster maps of all states. This data is not
available for perusal in the public domain.
Currently, 111 out of the 208 sanctioned Common Facility Centres (CFCs) in India have
not been completed, and 111 out of 309 Infrastructure Development (ID) Projects are still
ongoing. (Ministry of MSME). 1,018 initiatives have been implemented across 964 clusters in
29 States and 1 Union Territory as part of the program. A total expenditure of Rs. 75.01 Crore
has been utilised during the financial year 2015-16, up to March 30, 2016, under the Micro
and Small Enterprises-Cluster Development Programme (MSE-CDP) to implement diverse
interventions[12]. However, inadequate planning and implementation of the project, the
inability to complete and operationalise the Common Facility Centre (CFC) due to delayed plot
allotment to Special Purpose Vehicle (SPV) members, insufficient infrastructure development,
and the failure to secure the remaining grant from the Government of India (GoI), not only
led to the non-achievement of scheme objectives but also made the expenditure of ₹8.89
crore, including a GoI grant of ₹5.67 crore, invested in establishing the CFC unproductive.
(Comptroller and Auditor General of India, 2021) (PIB, 2023) (Ministry of Micro, Small and
Medium Enterprises, 2023)
The limited effectiveness of a widely acknowledged competitiveness tool, such as cluster
development, can be attributed to the incomplete adoption and application of this concept
within the Indian context. The definition and formation of clusters in India are narrow and
restrictive, considering geographical proximity as the main criterion. However, successful
frameworks using cluster analysis consider complementarities, linkages and interconnections.
Italy, a success story in cluster development, encompasses supporting industries in its
programme and bases its analysis on “specialisation, cooperation and flexibility.” (Report of
the Expert Committee on Micro, Small and Medium Enterprises, 2019). Indian MSMEs need
a framework that considers both preceding and succeeding complementarities, forming a
comprehensive system that enhances competitiveness across all facets of their growth.
Evaluation
of State
Policies
The Central Government in India has established a range of policies to bolster the MSME
sector. These central schemes, while beneficial nationally, require state-level policies tailored
to local industrial needs for MSMEs to be effective. State-level MSME policies, however,
have not been the focus of extensive research and lack of consistent evaluation and detailed
performance data. In our study, we adopted a structured approach to assess state-specific
MSME policies across India. Initially, we collected policy documents from each state,
categorizing them by the presence of a dedicated MSME policy or recent updates to their
industrial policy. We then pinpointed four crucial pillars for MSME development and examined
the initiatives each state implemented under these pillars. Through a comparative analysis,
we evaluated the breadth and impact of these initiatives, offering insights into their potential
effects on India’s MSME sector. However, our study was limited by the inability to perform
The Central
Government
in India has
established a
range of policies
to bolster the
MSME sector. 89
deep, on-the-ground analyses due to a lack of comprehensive data on policy implementation.
This limitation restricted our ability to suggest highly effective policy recommendations. Our
research serves as an initial, comprehensive step towards understanding state policy impacts
on MSMEs and paves the way for future studies, contingent on the availability of more detailed
data on policy performance.
The Central Government has implemented numerous policies to support the MSME sector,
as discussed in detail in the preceding section. While these central schemes are designed to
serve the entire nation, effective state-level policies are crucial for the growth of MSMEs as
State-specific policies can be tailored to the unique requirements of industrial units within
a particular state and can assist these units in addressing the specific challenges they
face. The MSME policies at the state level is a subject that has not drawn much focus in the
literature. The state policies thus have suffered from a lack of regular evaluations and scrutiny.
There is also lack of information on the performance of such policies as even though these
policies are implemented, there is lack of information regarding their performance at the grass
roots level. In this section, we employed a structured methodology to evaluate the MSME
policies of various states in India. Initially, we gathered policy documents from each state,
classifying them based on whether they possessed a dedicated MSME policy document or had
recently updated their industrial policy. Subsequently, we identified four fundamental pillars
critical to MSME development and proceeded to scrutinize the initiatives implemented by each
state under these identified pillars. 90
Through a systematic comparative analysis, we assessed the scope and coverage of these
initiatives. This methodological approach facilitated a nuanced evaluation of state-level
policies, shedding light on their potential impact on the thriving MSME landscape in India.
While we recognise the limitations inherent in our study, particularly our inability to conduct
in-depth on-the-ground performance and implementation analyses of these policies, which
consequently constrains our capacity to provide highly efficient policy recommendations for
the states, the primary challenge we encountered during our analysis was the unavailability
of comprehensive data regarding the execution of these policies. Our study would have been
significantly more reflective of the actual on-the-ground conditions and outcomes of these
schemes had there been access to high-quality data on the performance of these policies.
However, our work can be taken as a very thorough first step towards making such an analysis
of state policies and can lead to further research on the topic.
Our research serves as an initial, comprehensive step towards
understanding state policy impacts on MSMEs and paves the way for
future studies, contingent on the availability of more detailed data on
policy performance. 91
13
The states with MSME policy are Andhra Pradesh, Assam, Chhattisgarh, Goa, Haryana, Madhya Pradesh, Meghalaya,
Odisha, Sikkim, Tamil Nadu, Uttar Pradesh, Kerala, Rajasthan, Uttarakhand and West Bengal. Detailed appendix
There are some significant efforts made by a few states to promote MSME development in the
country. However, there is a general lack of adequate emphasis on this sector among state
governments. The evidence for the lack of emphasis lies in the fact that only 15 out of the
28 states
16
have a specialised MSME policy in the country; for the other 13 states, either the
MSME sector forms a small part of the elaborate industrial policy, or there is the absence of
MSME-specific policies in the state. Although there has been a lack of adequate focus from
the states on the sector, the states have made some progress in providing some impetus to
the MSME units, especially in recovering the costs of setting up new businesses. There is a
capital investment subsidy provided to the states, usually up to 25%, that helps MSMEs set up
their plant and machinery and covers major capital expenditure for the same. The Stamp duty
exemption of up to 100% is being provided to the sector, which incentivises the firms to set up
and eventually formalise. To ascertain that the MSMEs are producing quality products and able
to market their product better, the firms are encouraged to get certified through subsidies
and reimbursement for costs incurred for certification. In addition to the financial incentive,
a single window clearance system is established to make the process simpler for the units.
Introducing the Zero Defect Zero Effect (ZED) certification is a new concept in the policy space.
Acquisition of the ZED certification helps the firms publicise the fact that they have sustainable
production methods and are able to market their products better, especially in the foreign
market. While the state government’s initiatives represent a positive step towards addressing
the challenges faced by MSMEs in the country, these policies fall short of adequately
addressing the fundamental issues that hinder their growth and success. 92
Learnings and
Recommendations 93
GVCs serve as critical facilitators of the international exchange
of investment, knowledge, and managerial practices that are
in line with global standards, thereby significantly bolstering
domestic businesses
Learnings and
Recommendations from
National-Level Policies
1.
A. Access to Finance
i. Overhauling CGTMSE fund for Growth and Accessibility of MSME Credit
ii. Scaling up NBFCs
The Trust managing the CGTMSE fund lacks regulatory authority and oversight in its
operations, governance, and access to state-owned funds. The government should
bring the Trust under a regulatory authority to balance fund availability with financial
discipline and support low-end entrepreneurial activities. Guarantee coverage
should be raised to 100% for units led by women promoters to encourage women
entrepreneurship. Also, there is a need to reduce CGTMSE premium rates to encourage
even more wider adoption by micro and small enterprises. Lowering CGTMSE premium
rates will expand access for micro and small enterprises. Also, to enhance transparency,
the details of applicable CGTMSE premiums should be disclosed on participating banks’
websites or the CGTMSE portal for every member bank.
Non-Banking Financial Companies (NBFCs) are increasingly becoming a preferred
source of credit for MSMEs, particularly micro-sized enterprises, due to their ability
to reach remote areas, make quicker lending decisions, provide prompt services, and
specialise in niche segments. During Q1 of FY24, NBFCs accounted for 14% of MSME
credit demand, witnessing the fastest growth at 39%. The time-series graph below
shows that while private banks have a large share of originations and continue to grow,
NBFCs are growing their share in small and medium segments 94
MSME Loan
Disbursement/
Origination by
Lender
Fig. 18
0%
0%
0%
10%
10%
10%
20%
20%
20%
30%
30%
30%
40%
80%
40%
50%
50%
50%
Jan - 20
Jan - 20
Jan - 20
Jan - 21
Jan - 21
Jan - 21
Jan - 22
Jan - 22
Jan - 22
Jan - 23
Jan - 23
Jan - 23
Micro
Small
Medium
PSB
Private
NBFC
Others 95
However, a major challenge for NBFCs lies in offering credit at competitive interest rates,
which typically range between 15-25%, depending on the borrowing costs they face from
banks. Assessing the creditworthiness of MSMEs also remains a time-intensive process,
requiring significant effort to analyse cash flows and build accurate credit scores. Additionally,
banks often lend to NBFCs based on collateral, further driving up borrowing costs and
limiting their ability to offer affordable credit. The lack of access to lower-rate funding and
inefficiencies in the on-lending process further restrict NBFCs' capacity to meet the MSME
sector's credit needs effectively.
The 46th report of the Standing Committee on Finance (17th Lok Sabha), titled “Strengthening
Credit Flows to the MSME Sector”, observed that SIDBI's loan portfolio in FY21 stood at only
₹1.56 lakh crore, which was significantly smaller—around one-fourth—of NABARD's ₹6.03
lakh crore portfolio during the same period. This highlighted the need for SIDBI to expand its
balance sheet to better support the financial institutions serving MSMEs. To address this, the
Committee recommended strengthening SIDBI’s equity base, noting that an enhanced capital
base would substantially boost SIDBI’s ability to provide wholesale financing to NBFCs catering
to the MSME sector.
While the Ministry of Finance (in the 68th report about “Action taken by the Government on
the Observations/Recommendations contained in the Forty-Sixth Report (17th Lok Sabha)
on the subject ‘Strengthening Credit Flows to the MSME Sector”) responded that SIDBI
is currently well-capitalized to meet its projected growth, the Committee emphasised the
importance of further scaling SIDBI’s role as the principal financial institution for MSMEs.
Given the challenges NBFCs face in accessing wholesale financing and raising funds at
competitive rates, the Committee suggested that SIDBI could play a pivotal role by investing
in smaller NBFCs to improve their capacity and corporate governance, thereby transforming
them into stronger financial intermediaries.
To further support the MSME sector, the Committee proposed
several measures: loans from banks to NBFCs for on-lending to
MSMEs should be classified as indirect finance to MSMEs under
Priority Sector Lending, as was the case before 2011. Additionally,
the introduction of credit insurance by IRDAI through insurance
companies could help mitigate risk perceptions for NBFCs
and MFIs, enabling greater credit flow to MSMEs,
particularly micro-enterprises. These steps would ensure
that SIDBI’s role becomes more impactful and aligned
with the needs of the MSME
sector.
This highlighted
the need for
SIDBI to expand
its balance sheet
to better support
the financial
institutions
serving MSMEs 96
SOME TAXATION ISSUES OF MSMEs
The Finance Act 2023 introduced a new rule, Section 43B(h), which requires
businesses to pay their MSME suppliers within 45 days to claim tax deductions. This
has caused significant concern among MSMEs, as it can disrupt their cash flow and
lead to potential financial losses since buyers (of MSMEs’ products) can reorient
their sourcing and purchasing preferences to non-MSME sellers. Many industry
bodies, such as CAIT and CMAI, have appealed to the government to reconsider the
implementation of this rule, citing its potential negative impact on the MSME sector.
MSMEs face complex GST compliance requirements, including filing multiple
returns (e.g., TCS, ISD, and annual returns) across states. This demands significant
administrative effort and technical expertise, which MSMEs often lack. Usually, it’s
the proprietor himself managing accounting and book-keeping tasks.
Issues relayed to Input Tax Credit: When payments
extend payment terms beyond 180 days (sometimes
due to specific terms in the agreement), the input
tax credit can be reversed. This means working
capital blockages for MSMEs and the additional
burden of reclaiming ITC upon payment.
B. Addressing skilling challenges faced by MSMEs
The data shows that a significant portion of the workforce is concentrated in Skill Level 1 (low-
skilled) and Skill Level 2 (semi-skilled) categories, while highly skilled workers (Skill Levels 3 and
4) remain limited. At the same time, for example, there have been significant advancements
in India’s Biotech Innovation Ecosystem. Over nine years, for example, BIRAC has facilitated
the creation and support of 4,800 startups and entrepreneurs and helped establish 95 bio-
incubators across 21 states/UTs. This has led to the creation of 35000 high-skilled jobs. Such
developments call for investments in STEM education, and initiatives like the Skill India Mission
should be tailored to the requirements of a fast-evolving job market, emphasising innovation
and technological advancements.
Analysis of PLFS data shows that a substantial proportion of the workforce aged 15 to 59
lacks formal vocational or technical training. While the proportion has decreased from 91.9%
in 2017-18 to 72.6% in 2022–23, it still indicates a significant gap in formal skill development
for a substantial segment of the Indian workforce. Creating partnerships between industries,
educational institutions, and the government can help design curriculum and training modules
that equip workers with skills relevant to future job markets. Implementing shorter courses,
online/hybrid training and on-site training options can accommodate the diverse needs of
MSMEs. 97
C. Technological Development in MSMEs
i. Enhancing Supply Chains
Enhancing supply chain linkages for the technological development of MSMEs is critical to
improving their efficiency, competitiveness, and global participation. Governments play a
pivotal role in this process by fostering collaborative initiatives across sectors, strengthening
supply chain integration, and addressing key impediments to growth. Here are several reasons
why this is essential:
Efficient supply chains enable MSMEs to integrate into GVCs, facilitating their involvement
in international trade. Despite progress, India’s GVC participation (40.3% of gross trade in
2022) lags behind not only major economies like the USA (43.7%) and Japan (46.6%) but also
regional competitors like South Korea (56.2%) and Malaysia (60%) as per Economic Survey
2024. Enhancing supply chain linkages can help bridge this gap, fostering economic growth
and global competitiveness. Supply chains act as critical drivers for increasing the Gross Value
Addition (GVA) of MSMEs by streamlining operations and reducing inefficiencies. Investments
in supply chain technology, such as electronic linkages in the textile industry, can lead to
process innovation, better quality control, and improved product management, thus boosting
GVA and operational efficiency. Pressure within supply chains significantly impacts prices,
especially for essential commodities like food. By addressing bottlenecks and enhancing
supply chain efficiency, governments can help stabilize food prices, a crucial factor in ensuring
food and nutrition security. Complex supply chains influence competitive export pricing,
even within domestic markets. By simplifying procedures, improving trade infrastructure, and
facilitating trade measures, MSMEs can offer globally competitive pricing, enhancing their
export potential. Targeted government initiatives can unlock sectoral potential. For instance,
investments in electronic supply chain infrastructure in textiles and government support for
MSMEs in food processing through trade fairs and export promotion programs can drive
innovation, quality improvement, and market access. Agriculture and allied sectors, integral to
India’s economy, face challenges like climate change and resource sustainability.
Occupational standards tailored to MSME needs should be created and regularly updated to
ensure relevance and quality. Further, boards or councils which continually review and update
training curricula to keep pace with industry changes and technological advancements should
be created.
To upskill and train, affordable and more accessible cost-sharing models can be explored.
These can also be explored by providing grants to micro-enterprises that can offset the costs
of training and technology adoption initiatives. They can also include options for training
existing and new employees.
The government in Andhra Pradesh recently proposed an important initiative: a Skill Census.
Such an exercise can comprehensively assess current skill levels across the state’s regions and
sectors. All states can undertake this activity. This will help map out the exact skills that are
deficient and in line with industry demands at a granular level.
The government
in Andhra
Pradesh recently
proposed an
important
initiative: a Skill
Census. 98
Enhancing supply chain infrastructure in agriculture, horticulture, and food processing can
help unlock employment potential, sustain food security, and support adaptation efforts in the
face of geopolitical and technological threats to manufacturing and services.
ii. Enhance Risk Management through Digital and Insurance Solutions
iii. Integrating AI in MSMEs
Indian MSMEs must be introduced to affordable, digital risk management solutions that
help businesses track supply chains, monitor inventory, and manage logistics in real time.
Technologies such as sensor-based tracking for goods or automation tools for inventory
management can reduce operational risks. It will require developing tailored insurance
products that combine traditional risk transfer with innovative digital tools (e.g., IoT-based
risk monitoring) for MSMEs to be encouraged to adopt insurance solutions that protect them
against economic shocks, such as pandemics or natural disasters. For beverages and food-
related value chains in Malaysia and Thailand, insurance combined with sensor-based cargo
tracking devices has proved to be an important and holistic resilience solution to reduce the
risk of damage to property and goods in transit states a report about MSME resilience in
Thailand and Malaysia by United Nations Development Programme (UNDP). These solutions
not only mitigate risks but also address them and help to build further customised solutions,
especially for distribution partners or aggregators. Further, MSMEs must be educated on
the importance of digital tools and insurance for business continuity and growth. Insurance
providers and tech firms can partner to offer training and affordable packages to enhance
MSMEs’ resilience.
Integrating Artificial Intelligence (AI) into MSMEs presents multiple challenges that hinder
widespread adoption, as per a joint study by Nasscom and Meta . Many MSMEs struggle to
understand and comply with India’s data protection laws. This lack of awareness makes it
difficult for businesses to manage data responsibly and comply with legal requirements. Also,
MSMEs need better guidance on complying with legal frameworks while integrating
AI. Lack of clear understanding of the legal landscape can result in unintentional
non-compliance. MSMEs should receive accessible, simplified guides and training
programs on data protection
laws. The government and
industry bodies can create
awareness campaigns
and offer workshops
to help
businesses 99
iv. Increase Institute for Collaborations (IFCs)
As defined by Porter and Emmons in (Institutions for Collaboration : Overview . Background
note, January 2003), IFCs encompass both formal and informal actors that actively promote
the establishment and growth of clusters among involved stakeholders. IFCs serve as
instrumental entities in cluster development, contributing significantly to product research
and development (R&D). Their influence extends beyond product development, encompassing
the enhancement of productivity, fostering innovation, and optimising processes through
innovative methodologies. The proximity of IFCs to any cluster is paramount, as it substantially
contributes to its overall productivity and innovative capacity.
For MSMEs, forging connections with IFCs proves particularly beneficial, providing them with
opportunities to upgrade their technology. Given the inherent constraints of limited resources
and capabilities faced by MSMEs, IFCs emerge as invaluable partners in undertaking essential
research and innovation endeavours. In the Indian context, the Micro and Small Enterprises-
Cluster Development Programme (MSE-CDP) has incorporated Common Facilitation Centres
(CFCs). These CFCs are designed to furnish shared infrastructural facilities to MSMEs.
However, a compelling need exists to elevate the sophistication of these CFCs to align them
with the high standards set by IFCs. Strengthening IFCs demands a strategic approach
involving membership consolidation and expansion.
understand how to safeguard data and build compliant operations. Governments and industry
associations should provide targeted guidance, including mentorship programs and resources
that demystify the legal aspects of AI adoption. A dedicated legal compliance resource centre
can help MSMEs navigate the complexities of data protection and other AI-related regulations.
An important aspect is the lack of availability of expertise on AI with MSMEs. In the study, 74%
of MSMEs acknowledge AI’s potential but lack the in-house expertise to identify and integrate
suitable AI tools into their workflows. 72% of MSMEs reported difficulty accessing the training
needed to upskill their workforce for AI implementation. The absence of trained staff makes
understanding complex algorithms and data science methodologies difficult. A collaborative
space for MSMEs with academic institutions, startups, and AI consultants can help to bridge
the skills gap. Governments and private players should create affordable, accessible training
platforms focused on AI and digital skills. Industry partnerships can help create training
programs tailored to the specific needs of MSMEs, offering both online courses and hands-on
workshops to build the AI expertise required for successful implementation.
59% of MSMEs face financial limitations that hinder their ability to invest in AI technologies,
which include high costs of AI tools, compute infrastructure, and training. Additionally, 91%
of MSMEs believe AI should be democratically available and affordable. For example, MSMEs
could be provided financial support, such as subsidies, grants, or low-interest loans, to help
them invest in AI. Public-private collaborations can offer affordable AI solutions, including
cloud-based models that reduce upfront costs. Further, offering tax incentives or special
funding programs for MSMEs adopting AI technologies can ease financial constraints.
IFCs serve as
instrumental
entities in cluster
development,
contributing
significantly to
product research
and development
(R&D). 100
Some technological solutions to enhance credit flow of
MSMEs under development:
GST SAHAY is a digital lending platform that aims to
provide MSMEs with easy and quick access to credit.
It leverages the power of technology and the vast
amount of data generated by the Goods and Services
Tax (GST) system to assess the creditworthiness of
MSMEs. GST SAHAY aims to address the challenges
MSMEs face in accessing credit, particularly those
that lack traditional collateral.
GST SAHAY utilises the GST invoices generated by MSMEs as
collateral to assess their creditworthiness. This means that MSMEs can access
credit based on their business transactions rather than traditional collateral like
property. The platform is entirely digital, making it easy for MSMEs to apply for and
receive loans. The use of technology and the integration with the GSTN (Goods and
Services Tax Network) allow for faster loan processing and disbursement. Integrating
GSTN with the Account Aggregator (AA) framework is crucial in making GST SAHAY a
reality. This integration will allow seamless access to financial data, making the credit
assessment process even more efficient and transparent.
The Ministry of MSME is actively working to transform the UDYAM Portal into a
comprehensive one-stop solution for MSMEs. This involves integrating the portal
with other relevant platforms, collaborating with SIDBI to develop the Udyam Assist
Platform, and utilizing the Digilocker platform for secure document storage.
The Ministry launched the Udyam Assist Portal (UAP) on January 11, 2023, to further
extend support to the informal sector. This portal aims to facilitate the onboarding
of Informal Micro Enterprises (IMEs), enabling them to access the benefits of
Priority Sector Lending. The UAP empowers IMEs to tap
into various financial and non-financial support schemes
by simplifying the registration process and providing a
digital platform.
GST SAHAY App
UDYAM Portal and Udyam Assist Portal (UAP)
Source: 68th report of Standing Committee on Finance (2023-24) “Action taken
by the Government on the Observations/Recommendations contained in the
Forty-Sixth Report (17th Lok Sabha) on the subject ‘Strengthening Credit Flows to
the MSME Sector”.
To achieve this, initiatives should foster collaboration and knowledge networks among
universities, research institutes, and private entities. Such collaborative efforts will facilitate
seamless R&D and knowledge exchange, thereby enhancing the overall capabilities of IFCs
and, consequently, the clusters they support. Furthermore, it is imperative to establish forums
for the timely sharing of industry information. A thorough review of the property rights
framework is essential to mitigate the risks associated with companies divulging trade details
through IFCs to other industry players. 101
Learnings from States’
MSME policies
2.
Examining the landscape of MSME policies across various states and union territories reveals
the existence of schemes and incentives to support them. However, the mere existence of
these policies falls short of ensuring their efficacy. A substantial challenge arises from the lack
of awareness among MSMEs regarding these policies, impeding their macro-level utilisation.
Furthermore, the prevailing policies often inadequately address the substantial challenges
faced by MSMEs, primarily stemming from the omission of various stakeholders during the
policy formulation process. To augment the formulation of effective policies, policymakers
must prioritise regular consultations with stakeholders at all levels.
At the individual level, MSMEs confront disproportionate challenges in navigating and deriving
benefits from available schemes. Inherent limitations in financial, technical, and administrative
capabilities impede their access to opportunities, preparation of tender documents, and
fulfilment of contractual obligations. Financial constraints frequently hinder their participation
in schemes that necessitate substantial investments.
The response of state governments to these challenges has been less than comprehensive.
Existing policies lack the requisite depth to effectively target individual-level challenges.
State governments ought to identify and prioritise specific issues, concurrently working
to enhance awareness about existing schemes. The current piecemeal approach in policy
design and implementation underscores the urgent need for a more cohesive, strategic, and
inclusive approach to fortify businesses in the MSME sector. This necessitates addressing
individual-level challenges and ensuring the effective implementation and widespread
dissemination of these schemes.
Access to Finance
Access to finance remains a significant challenge for MSMEs in India, despite efforts by state
governments to address this issue. Many states have introduced capital-intensive subsidies to
reduce the financial burden of establishing or expanding businesses. While such policies are
helpful, they often focus solely on the initial stages of an enterprise's life cycle, overlooking
the unique financial needs of MSMEs at later stages. States like Uttar Pradesh, Jharkhand, and
Manipur have introduced interest subsidy schemes for both term loans and working capital
requirements. However, these subsidies often come with minimum turnover requirements,
excluding micro-enterprises from benefiting. To address this, policies must focus on reducing
eligibility barriers and catering to the financing needs of MSMEs throughout their lifecycle.
Additionally, there is a lack of support for financing instruments beyond traditional bank
credit. While states like Haryana, Gujarat, Odisha, and Himachal Pradesh have incentivised
SME listings on stock exchanges such as the BSE SME platform and NSE EMERGE, this option
primarily benefits high-end SMEs with strong financial knowledge and records. Smaller firms,
which often lack bookkeeping expertise and financial literacy, are left out. To bridge this gap,
state policymakers need to explore alternative financing options, such as cash-based lending,
equity financing, factoring, leasing, and venture capital, while ensuring smaller MSMEs receive
targeted support. 102
Insurance coverage is another neglected area. Except Manipur, which offers subsidies on
insurance premiums for MSMEs, most states lack structured frameworks to help businesses
safeguard against unforeseen risks and losses. Moreover, no state-level initiatives currently
focus on assessing financial literacy or providing interventions to enhance it, leaving MSMEs
ill-prepared to navigate complex financial systems. Comprehensive and inclusive policies are
essential to address these gaps and ensure financial stability for MSMEs nationwide.
Access to Markets
MSMEs in India face significant challenges in accessing markets due to limited production
capacity, lack of branding, and a focus on serving only local markets. While the public
procurement policy aims to support micro and small enterprises (MSEs) by offering
competitive pricing opportunities, medium enterprises remain excluded, disincentivising
growth.
Furthermore, most state governments have not taken sufficient steps to enhance the
competitiveness of MSME products and services in local or international markets. Only a few
states, such as Andhra Pradesh, Madhya Pradesh, Sikkim, Tamil Nadu, Tripura, and Kerala, have
implemented export incentives, highlighting a critical gap in fostering export competitiveness.
These states also support MSMEs with initiatives like quality certifications, market research,
and buyer-seller meetups.
At the same time, Bihar and Haryana provide additional benefits such as freight
reimbursements and e-commerce platforms like “Made in Haryana.” However, most states
lack proactive measures, leaving MSMEs ill-equipped to compete globally. To address this,
coordinated state-level efforts are needed to empower MSMEs with targeted regulatory,
administrative, and policy interventions, enabling them to access global markets effectively.
A study by J-PAL on Indonesia suggested that the rapid growth of e-commerce and logistics
services is crucial for developing micro, small, and medium enterprises (MSMEs) in developing
countries. Investment in transport infrastructure can lead to better business outcomes while
also promoting economic growth and improving household welfare.
Moreover, MSMEs should focus on developing innovative products, particularly in high-tech
sectors such as semiconductors and biotechnology, with state-level initiatives tailored to
districts that provide an enabling environment for integration into global value chains.
MSMEs tend to allocate a small subset of their investments in research, design, and product
development. Their cooperation within the value chain is often driven by dependence on
larger market players, leaving most SMEs with little freedom to choose the markets in which
they operate.
MSMEs tend to
allocate a small
subset of their
investments
in research,
design, and
product
development. 103
»Among the SMEs in textile manufacturing, collaboration with Indian and international
design schools, investment in new product technologies, and partnership with high-end
retail outlets need to be promoted.
»For chemical product sector SMEs, state governments should focus on expanding the talent
pool of engineers and researchers by increasing domestic and international collaboration
with students.
Additionally, providing training and workshops on modern marketing techniques, including
digital marketing, can help MSMEs diversify into by-products and develop niche markets
to boost their competitiveness. In the chemical products sector, state governments can
focus on strengthening the marketing capabilities of SMEs to help them move downstream
in the value chain. This can be achieved by creating collaborative platforms that connect
SMEs with specialised marketing agencies or consultants in the chemical industry, enabling
them to refine marketing strategies, target audiences effectively, and enhance their overall
competitiveness. By addressing these sector-specific needs, state governments can
significantly contribute to the growth and sustainability of MSMEs. 104
Access to technology and infrastructure
Access to technology and infrastructure remains a critical challenge for MSMEs, despite
initiatives like the National Credit Linked Capital Subsidy for Technology Upgradation (CLCS-
TU) and state-level schemes such as Kerala’s Industry Varsity Linkages, Haryana’s Credit Linked
Advanced Technology Adoption scheme, and subsidies for technology purchases in Odisha
and Punjab. While these programs aim to enhance technological adoption, their reach is often
limited to medium and high-earning small enterprises, focusing on advanced technologies
like automation, IT systems, and IP registration. Unfortunately, the vast majority of micro-
enterprises—forming the backbone of the MSME sector—remain excluded as these schemes
fail to address their basic technological needs, making scalability a persistent issue.
India’s States must develop sector-specific MSME policies to support micro and small-
sized firms by upgrading their outdated technologies, enhancing productive capacity,
and ensuring equitable benefits to ensure coordinated and integrated development at the
regional level.
For example, under the 14th 5-year plan (2021-25), China has aimed to accelerate the digital
transformation of its enterprises by constructing network infrastructure, modern industrial
platform systems and intelligent workshops/smart factories within the subsectors of its textile
industry.
Efforts to provide quality infrastructure through industrial parks with MSME-specific
reservations have shown promise, but high rental costs often make them inaccessible to
smaller firms. While the Central government’s Common Facility Centers are a positive step,
states must establish their own infrastructure to support micro-enterprises through
co-working spaces and shared facilities tailored to their unique requirements. Moreover,
addressing operational inefficiencies in existing industrial parks, as highlighted in CAG reports
in the previous section, is crucial before expanding new facilities.
Skill Development
MSMEs in India face significant challenges in accessing capacity-building opportunities due
to financial illiteracy, operational skill gaps, and limited awareness of government schemes.
Despite the critical need for skill development, only eight states—such as Andhra Pradesh,
Bihar, Goa, Chhattisgarh, Haryana, Karnataka, Kerala, and Rajasthan—currently provide
partial subsidies for employment training. However, these initiatives fall short of addressing
the dynamic skill requirements of MSMEs, as the training curricula are often outdated and
misaligned with the sector’s evolving needs. Own Account Enterprises (OAEs) and nano-
enterprises face additional hurdles, including high opportunity costs associated with lengthy
training programs that divert focus from daily operations. To address these challenges,
tailor-made policies are needed to ensure last-mile connectivity and extend training benefits
to micro-enterprises, particularly in rural India. These programs must be accessible, free of
charge, and specifically designed to meet MSMEs’ unique skill and technology needs, enabling
their sustained growth and success in diverse settings.To address these
challenges,
tailor-made
policies are
needed to
ensure last-mile
connectivity
and extend
training benefits
to micro-
enterprises,
particularly in
rural India. 105
Policy formulation, feedback and communication
A significant challenge faced by state-level policies in the country is the absence of consistent
monitoring and evaluation. Despite the existence of numerous policies, the issues plaguing
the MSME sector persist. A primary reason for this is the lack of awareness among potential
beneficiaries regarding these policies.
Increased awareness is critical to ensuring that the schemes introduced for the sector
reach and benefit the intended recipients. Additionally, the introduction of policies alone
is insufficient; their performance needs continuous evaluation by states to gauge their
effectiveness in achieving objectives. The lack of evaluation results in a dearth of informative
evidence, hindering independent research and the formulation of key recommendations for
policy improvement. Before considering augmenting or altering existing policies, a thorough
evaluation of their implementation and performance through timely government-conducted
surveys is imperative.
The Economic Survey 2024 recommended upgrading statistics on industry to aid policy
making. It stated that state-level industrial production and employment indices, which
measure and communicate the changes in India’s manufacturing setup, are needed to
understand regional patterns. The economic survey also recommended polishing information
about cross disbursement of bank credit industry industry-wise monthly gross financial
flows through domestic and external equity and debt routes and other financing sources.
Furthermore, making the evidence from these assessments public would facilitate further
research in the field.
Another issue is the inadequate interaction between stakeholders and policymakers in
MSMEs. The lack of engagement has led to policymakers overlooking grassroots challenges
faced by enterprises, such as Owner-Operated Enterprises (OAEs) and women-owned
enterprises. These enterprises face unique challenges that differ from capital- and technology-
intensive enterprises. Many policies focus on technology upgrading, neglecting OAEs and
women-led enterprises that may not be as technology-intensive. To identify and address such
issues more effectively in future policy formulation, increased participation of stakeholders,
including representatives and lobbyists of MSMEs, is crucial. Establishing MSME-specific
forums could serve as a foundational step for enhanced participation and improved policy
formulation in the sector.
Uninterrupted power supply is another pressing issue. States have focused on making power
affordable through connection charge reimbursements (e.g., Gujarat) and per-unit subsidies
(e.g., Madhya Pradesh). Still, affordability alone does not resolve the problem of irregular
supply. MSMEs, especially micro-enterprises, cannot afford backup power solutions like
generators, making power outages a significant obstacle to their efficiency and productivity.
Governments could address this by introducing subsidies or tax credits for renewable energy
solutions, such as solar panels, or by developing industrial clusters with shared power facilities
and resources. Collaborative interventions, such as partnerships with IFC for sector-specific
solutions, would also help bridge infrastructure gaps and ensure sustainable growth for
MSMEs. 106
The Union Budget presented in July 2024, and the Economic Survey 2024
highlighted various struggles of MSMEs and listed several specific solutions.
These were:
A. MSMEs face challenges in securing affordable and timely funding due to lack of collateral, credit history,
high interest rates, complex documentation, and lengthy processing times, leading to an estimated credit
gap of ₹20-25 lakh crore. To address this, the Economic Survey 2024 recommends strengthening support
systems to make MSME projects more attractive to banks and other financiers. This could be done by
mobilizing private capital through innovative financing instruments like venture capital and impact investing.
The Union Budget announced Capital Investments for Technological Upgradation scheme. The new credit
guarantee scheme has been introduced to support machinery and equipment purchases without requiring
collateral or third-party guarantees:
B. Extensive regulations and compliance requirements, particularly from state governments, limit MSME
growth and job creation. Threshold-based incentives often discourage expansion, as businesses aim to stay
within limits. The Economic Survey suggests that states should simplify regulations and reduce compliance
burdens to allow MSMEs to focus on growth. This can be achieved by gradually easing compliance through
single-window clearance, digitising processes, and providing tools to help MSMEs manage these efficiently.
The Union Budget 2024 announced a new credit assessment model to tackle informality. In this model,
Public sector banks will now develop in-house capabilities to assess MSMEs using a new model based on
their digital footprint.
C. The Economic Survey 2024 highlighted that most MSMEs, especially in sectors
like textiles and apparel, operate on a small scale, limiting efficiency and
economies of scale. Beyond closing the credit gap, the focus should be on
deregulating the MSME sector, enhancing physical and digital connectivity,
and developing an export strategy to expand market reach. Modernizing
industrial statistics in India is crucial for better policymaking. This includes
updating the index of industrial production, creating state-level indices,
and gathering data on MSME production and employment, enabling more
targeted support for industrial growth. In this regard, the Union Budget
announced the following schemes:
»This scheme allows businesses to secure term loans for capital investments more easily.
»A dedicated self-financing guarantee fund will pool credit risks, offering coverage of up to ₹100 crore per
applicant, enabling access to larger loan amounts.
»Borrowers must pay an upfront guarantee fee and an annual fee based on the reduced loan balance.
»This approach aims to be more comprehensive than traditional methods relying solely on assets or turnover
and will also include MSMEs lacking formal accounting systems.
»This scheme takes on the challenges of inadequate access to finance that small firms face due to a lack of
financial information and non-formal business practices. 107
»The limit of Mudra loans under the ‘Tarun’ category is to be increased from Rs.20 lakh to Rs.10 lakh for
those who have successfully repaid previous loans.
»New mechanism for banks and financial institutions to MSMEs during their stressed period.
»The turnover threshold for buyers for mandatory onboarding on the TReDS platform will be reduced from
500 crore to 250 crore.
»SIDBI will open new branches to expand its reach to serve all major MSME clusters within 3 years and
provide direct credit to them. With the opening of 24 such branches this year, the service coverage will
expand to 168 out of 242 major clusters.
»Financial support to set up 50 multi-product food irradiation units in the MSME sector.
»E-Commerce Export Hubs will be set up under public-private partnership (PPP) mode for MSMEs and
traditional artisans to sell their products in international markets.
1. Enhancing Institutional Support and Financial Assistance to Boost MSME Cash Flow:
2. MSME Units for Food Irradiation, Quality & Safety Testing:
Learnings from Cluster-
level Analysis
3.
Rethinking clusters for MSME development
India’s cluster policy, established in 1987, is rooted in the amalgamation of collective efficiency
and flexible specialisation, diverging significantly from strategies employed by developed
nations following Michael E. Porter’s cluster approach. Notable examples include the United
States and the European Union, which utilise cluster mapping initiatives to inform policy
decisions and promote cross-border collaboration.
For instance, the United States, through the Cluster Mapping Initiative led by the Harvard
Business School Institute for Strategy and Competitiveness, employs data and insights to
shape economic development strategies at various governance levels. Similarly, the European
Union, over the past thirty years, has been promoting cluster mapping through initiatives like
the European Cluster Observatory (ECO) and the European Cluster Collaboration Platform
(ECCP). ECO collects and disseminates data, while ECCP fosters cross-border collaboration
among businesses, research institutions, and clusters, particularly focusing on small and
medium-sized enterprises (SMEs). 108
In the Indian context, clusters cater to diverse markets, spanning local, regional, national,
and international levels. However, the success of these clusters should not be solely gauged
by international market links. Instead, there should be a shift towards emphasising product
diversification and enhancing local technological capabilities. While export-oriented strategies
are crucial, acknowledging the strong presence of a large, segmented domestic market is
essential—a dimension sometimes overlooked in discussions on value chain analyses.
To enhance the cluster development program for micro and small enterprises in India,
revisiting the definition of clusters is imperative. Regional policymakers can leverage cluster
policies as a pragmatic and convenient place-based organising principle, demonstrating
political commitment, pursuing an innovation policy mix, efficiently mobilising public
resources, and prioritising strategic regional sectors. Personalised services to SMEs,
addressing regional research and innovation weaknesses, should be offered. These services
can assess and review the innovation capabilities of private companies, providing roadmaps
for improvement. Additionally, clusters can be pivotal in promoting university-industry
collaboration, essential for fostering innovation, knowledge transfer, and strengthening
regional competitiveness. Clusters should actively encourage broader collaboration among
public and private research and technology organizations, serving as catalysts for collaborative
innovation activities between universities and industries.
Cluster specific Recommendations
A dominance of upstream activities is observed in almost all clusters. This may suggest
reliance on raw material processing and intermediate production stages rather than focusing
on higher-value end products, which can challenge enterprise competitiveness.
Cluster Recommendations Regions to focus on
Textile
Manufacturing
and Apparel »SMEs in Textile Manufacturing should focus on high-
value product design, local branding, customisation,
integrated supply chain services, and higher product
quality. Overall, India’s GVC integration should move
toward higher value-generating downstream activities
such as readymade garments (or clothing or apparel.
»To achieve these objectives without increasing costs,
they should collaborate with overseas and Indian
design schools, invest in new product technology,
partner with high-end retail outlets, link supply chains
electronically, and invest in capital equipment and local
training institutions for process innovation, product
management, and quality control.
»The Economic Survey 2024 highlighted technological
obsolescence as a significant contributor to problems
in the textile and apparel industry. This necessitates
investment in technology upgradation, especially in
weaving and processing segments.
»Improving the brand image of Indian apparel and
garments is needed to increase the unit value
realisation (UVR).
The analysis indicates regional
specialisation in
»Textile manufacturing in Surat, Panipat,
Sant Ravidas Nagar, Ludhiana, Varanasi,
Imphal East, Tiruppur, Namakkal, and
Erode.
»Apparel manufacturing in Tiruppur,
Ludhiana, Haulakandi, Bangalore, Erode,
Supaul, Coimbatore, Kaushambi, Gautam
Buddha Nagar and Sant Ravidas Nagar
To ensure economies of scale happen,
districts around these regions should
become more competitive. 109
Food Processing
Cluster »Agri-food policy actively directed at developing a link
between production and processing is the need of
the hour. For example, GoI efforts to put Millet Indian
products on the global map
»Maximise value added throughout the supply chain by
improving current processes and through innovation.
For Example: Combining goods-in-transit insurance
with sensor-based cargo tracking devices can help
reduce damage to property and goods in transit
»Stagnant market share in food products; Need to
diversify into other by-products -and develop other
niche markets.
»At the state level, branding guidance for agricultural
products for MSME projects and food cluster formation
is needed.
The analysis indicates regional
specialisation in:
»Food Processing and Manufacturing
in Tinsukia, Dakshin. Bastar Dantewada,
Kiphire, Mahoba
»Local Food and Beverage Processing
and Distribution This cluster is present
in most of the districts of India.
It must be noted that regional
specialisation is almost low and stagnant,
as more than 60 % of districts have lower
LQ, which lies between 2 and 0. Since
it’s a traded cluster and employs most of
the MSME sector, immediate steps are
required to improve the productivity of this
cluster across India.
Strengthening efforts in the northeastern
and eastern belts of India are urgently
needed. Due to the uniqueness and
diversity of the food products, these belts
demonstrate huge potential for integration
in GVCs.
Chemical Cluster »For SMEs involved in chemical products, the integrated
ecosystem is crucial, but the biggest challenge is
attracting and retaining skilled workers.
»State governments should focus on expanding the
pool of engineers and researchers through increased
collaboration domestically and international students.
»Due to their lower bargaining power, SMEs face higher
barriers to regulatory and compliance efforts regarding
products. To further minimise risk, compliance and
regulatory efforts need to be streamlined.
»Moreover, building stronger marketing capabilities is
imperative to facilitate progress downstream in the
value chain.
»Investments in Industry 4.0, such as predictive
maintenance, data analytics, and supply chain
optimisation tools, can enhance productivity and
reduce costs
»Reducing dependence on imported raw materials,
particularly from China, can be crucial for MSMEs.
Exploring alternative domestic suppliers or developing
more resilient supply chains can lower input costs.
The analysis indicates regional
specialisation in:
»Upstream Chemical Products in
Bharuch, Gwalior, Gandhinagar, Medak,
Nainital, Valsad, Palamu, Raigarh and
Uttara Kannada, Samba, Palwal and
Ujjain
»Downstream Chemical Products in
Virudhunagar, Dadra and Nagar Haveli,
Prayagraj, Bharuch, Karaikal, Sagar and
Thoothukkudi
More focus must be placed on targeting
MSMEs and strengthening their
dominance in both sub-clusters. 110
Automotive
Cluster »Investment in Intangible Assets
MSMEs in the automotive cluster prioritize tangible
assets over intangible ones like research and
development (R&D), design, and innovation. This limits
their ability to develop unique products and compete
globally in a rapidly evolving automotive sector.
This requires a shift in focus towards R&D, product
development, and innovation through tax incentives
and grants. It also necessitates establishing dedicated
innovation hubs and incubation centers to assist MSMEs
in adopting advanced technologies and fostering a
culture of creativity.
»Dependence on Larger Market Players
MSMEs often operate as suppliers or subcontractors in
the value chain, with limited freedom to explore markets
independently. This dependence restricts their growth
and bargaining power.
Promote cooperative frameworks within the value chain
to ensure knowledge sharing and skill development.
Create platforms that connect MSMEs directly to global
markets, enabling them to expand their operations
beyond a dependent role.
»Foster “Design and Innovation” Culture
Support MSMEs to transition into design-focused
enterprises by providing training programs, incubation
centres, and financial assistance for innovation projects
The analysis indicates regional
specialization in automotive clusters such
as Gurgaon, Saraikela-Kharsawan, Rewari,
Udham Singh Nagar, Faridabad, and Pune,
showcasing higher Location Quotient. 111
Key Takeaways
Access to Finance to fund MSME growth
»While MSMEs have gained better access to loans, a significant credit gap still exists in
the sector. To address this issue, recommendations include reforming the CGTMSE by
enhancing regulatory oversight and further reducing risk premiums for borrowers seeking
CGTMSE funding.
»Given their success in providing credit to MSMEs, especially in remote areas, NBFCs need to
scale up their operations. A crucial step in this process is for the SIDBI to play a significant
role by providing funding to help NBFCs improve their capacity and governance structures.
»At the state level, lowering eligibility barriers for schemes that offer subsidies for capital
and interest on loans will better address the financing needs of MSMEs throughout their
lifecycle.
Skilling and Manpower Growth
»The manpower needs of MSMEs in India demand significant investments in STEM
education. To meet the requirements of a rapidly evolving job market, training programs
must be aligned with current industry needs and provide last-mile connectivity, particularly
for micro-enterprises located in rural areas.
»Additionally, it is crucial to address the existing skills gap by reforming formal vocational
education and technical training. There should be a focus on improving financial literacy and
operational skills to effectively bridge these gaps.
»To expand and enhance existing training initiatives, more states should offer partial
subsidies for employment training. It is important to ensure that training curricula are
regularly updated and relevant to the changing needs of the MSME sector.
»Moreover, skill development initiatives must be made easily accessible, especially for MSMEs
that face challenges due to their location or size. These initiatives should be designed to be
practical and immediately applicable to daily operations.
Technological Development and Innovation
»Indian MSMEs need to strengthen supply chain linkages with additional requirements of
affordable digital risk management solutions to track supply chains, monitor inventory, and
manage logistics in real time. 112
Enhance the role and effectiveness of
the Institute for Collaborations (IFCs)
Enhancing Access to Markets, a better
Supply Chain Management to Enhance
the Quality of Products and Export
Competitiveness
»The role and effectiveness of IFCs must be enhanced to support cluster development,
particularly for MSMEs, by fostering research, innovation, and technology upgrades. This
involves building knowledge networks among universities, research institutes, and private
entities to expand IFC memberships, establishing forums for sharing industry information to
streamline R&D and reviewing property rights frameworks to mitigate risks in sharing trade
details.
»Upgrading Common Facilitation Centres (CFCs) under the MSE-CDP to meet IFC standards
will bolster their impact. Strengthened IFCs can drive productivity, innovation, and
competitiveness within the MSME sector, significantly contributing to its growth.
»Implement export incentives and enhance digital and e-commerce platforms, similar to
initiatives in states like Haryana, Bihar, Andhra Pradesh, and Tamil Nadu. Support measures
should include quality certifications, market research, and buyer-seller meetups.
»There is a need for tailored insurance products that combine traditional risk transfer
methods with digital tools to enhance the resilience of MSMEs. As AI becomes increasingly
indispensable in business processes, it is essential to create awareness campaigns and
offer workshops. Accessible training platforms and collaborative environments should be
established for exchanging ideas and learning. Additionally, subsidies, grants, and low-
interest loans can help MSMEs invest in AI technologies.
»Tailored policies are necessary to support the technological upgrading of micro and small
enterprises, addressing their basic technology needs and enhancing their productive
capacity. Furthermore, states should develop MSME-specific infrastructure, such as
co-working spaces, industrial parks, and shared facilities. These initiatives should be
complemented by policies that make rental costs more affordable for smaller firms to help
micro-enterprises access quality infrastructure.
»Technology upgrades are needed to overcome technological obsolescence, especially
in weaving and processing segments in textile manufacturing and apparel clusters.
Investments in Industry 4.0 are essential for chemical clusters. 113
Monitoring, Evaluation, and Stakeholder
engagement
»There is a critical need to raise awareness among potential beneficiaries about existing
policies and schemes for MSMEs to ensure they reach the intended recipients. State
governments must enhance outreach and communication to ensure policies are accessible
and understood by MSMEs. Regular surveys and assessments to monitor the performance
of MSME policies provide a basis for evidence-based improvements.
»Policymakers need to engage more effectively with MSME stakeholders, including
representatives of Owner-Operated Enterprises (OAEs) and women-owned enterprises,
which face unique challenges that are often overlooked.
»MSMEs in informal sectors also need to be captured in the government/public datasets.
Analysing this data using statistical methods will help derive insights and identify areas for
improvement towards reducing informality in the MSME sector
»Additionally, focus on high-tech sectors such as semiconductors and biotechnology.
Establish district-level initiatives that help integrate micro, small, and medium enterprises
(MSMEs) into global value chains.
»Among the SMEs in textile manufacturing, collaboration with Indian and international design
schools, investment in new product technologies, and partnership with high-end retail
outlets need to be promoted. State governments should focus on expanding the talent pool
of engineers and researchers for chemical product sector SMEs by increasing domestic
and international collaboration with students. They also need to support strengthening the
marketing capabilities of SMEs to advance downstream in the value chain and enhance
their competitiveness. Reducing dependence on imported raw materials can promote the
segment’s sustainable growth.
»The state government should invest in electronic supply chain linkage for SMEs in textile
manufacturing. This would involve investing in capital equipment and local training
institutions to foster process innovation, product management, and quality control.
»In Food processing, state governments can help the MSMEs by supporting international
trade fairs, exhibitions, export promotion programs, training and workshops on marketing
techniques and digital marketing geared towards diversifying into by-products and
developing niche markets. 114
Conclusion
The analysis of the MSME landscape in India faces several challenges stemming from the
limitations of the available data. One notable concern is the limited sample size of the dataset,
which may compromise its representativeness in the broader MSME sector. The inclusion bias
towards firms adhering to standardised bookkeeping practices raises questions about the
accuracy of assessing the value added by diverse enterprises, particularly micro-enterprises
that may not follow such practices.
Additionally, the dataset is plagued by a significant number of missing values, posing a
challenge to the reliability and comprehensiveness of the analysis. These gaps in crucial
indicators can affect the accuracy of value-added calculations, emphasising the need for
cautious interpretation of findings. Moreover, the methodological variations in the data
collection employed by the Centre for Monitoring the Indian Economy (CMIE) introduce
another layer of complexity. The proprietary nature of this methodology may deviate from
national and international standards, requiring careful consideration in interpreting analysis
results.
To address the limitations mentioned, in the study we have used Michael Porter’s approach
to understand SME cluster development. We used PLFS (Periodic Labour Force Survey) data,
underscoring the rationale for this inclusion. Given the scarcity of regular data specific to
MSMEs, we advocate for utilising available sources like PLFS data as an interim measure.
In our opinion, until a comprehensive and regularly updated dataset becomes available,
policymakers and researchers should give due consideration to this data, particularly for
its potential in understanding cluster-led developments in India. The PLFS data facilitates a
focus on state and district-specific requirements, providing valuable insights that can aid in
formulating targeted strategies for the growth and development of the MSME sector. This
approach acknowledges the current data constraints while emphasising the importance of
leveraging existing resources to inform more effective policy decisions and research initiatives.
The broader issue of insufficient data on Indian MSMEs, particularly concerning employment
trends, export contribution, and GVC integration, further compounds the challenges. The
lack of robust data impedes effective study of these factors, posing a substantial hurdle for
policymakers seeking to formulate strategies for the MSME sector. While the UDYAM database
stands as the sole regularly updated source, its limitations in capturing detailed data on
economic activity for employment, exports, and productivity restrict its utility. Furthermore,
the existing databases, including UDYAM and Prowess, fall short in providing comprehensive
insights into value addition, exports, and GVC integration, highlighting the necessity for their
enhancement.
Addressing these limitations is crucial for guiding an urgent and comprehensive examination
of the MSME sector. Specifically, improvements in the functionality of the UDYAM portal,
such as incorporating cluster-specific data and addressing the absence of NIC-level data
categorised by states, are essential steps. This enhancement is pivotal in establishing a
foundation for more informed policy decisions and fostering the competitiveness of MSMEs in
India. 115
State level MSME policy
State LinkFocus MSME or
Industrial
Year
Recently Updated
Andhra Pradesh MSME POLICY 2015-2020Micro and
Small
MSME 2015-2020
Arunachal PradeshIndustrial and Investment Policy 2020Industrial 2020
Assam The Assam MSME (Facilitation of Establishment and
Operation) Act, 2020
Micro and
Small
2020
Bihar Bihar Industrial Investment Promotion Policy (Textile &
Leather Policy), 2022
Industrial 2022
Chhattisgarh MSME POLICY – CHHATTISGARH STATE (2019-24)Micro and
Small
2019-24
GoaCompendium of MSME Policy and Incentive Schemes of Goa2022
Gujarat Gujarat Industry Policy 2020Industry 2020
Haryana Haryana MSME Policy 2019Micro and
Small
2019
Himachal PradeshThe Himachal Pradesh Industrial Investment Policy, 2019 Industry 2019
Jharkhand Jharkhand Industrial and Investment Promotion Policy 2021 Industry 2021
Karnataka Government of Karnataka INDUSTRIAL POLICY 2020-2025Industry 2020-25
Madhya Pradesh MP MSME Development Policy, 2021Micro and
Small
2021
Meghalaya Meghalaya Procurement Preference Policy for Micro and
Small Industries
Micro and
Small
2021
Odisha Odisha-MSME-Policy-2022Micro and
Small
2022
Punjab Punjab Industrial and Business Development Policy 2022Industrial 2022
Sikkim Sikkim Micro, Small and Medium Enterprises Policy, 2022Micro and
Small
2022
Tamil Nadu Micro, Small and Medium Enterprises Policy - 2021 Micro and
Small
2021
Tripura lntroduction of Trlpura Industrlal Investment' Promotion
Incentive Scheme (TIIPISI. 2022
Industrial 2022
Uttar Pradesh UTTAR PRADESH MICRO, SMALL AND MEDIUM
ENTERPRISES PROMOTION POLICY - 2022
Micro and
Small
2022
Not updated recently
Kerala MSME Schemes for Kerala State
Maharashtra The Industrial Policy of MaharashtraIndustrial
Rajasthan Rajasthan MSME Policy 2015MSME2015
Uttarakhand Uttarakhand Policies & IncentivesMSME
West Bengal MSME Policy 2013-18MSMEMSME
No policy document
Manipur
Nagaland
Telangana 116
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III. (2023). U.S. SME Access and Use of Digital Tools. https://www.trade.gov/sites/default/files/2023-06/SME_Digital_Tools.pdf Institute for Competitiveness, India is the Indian knot in the global network of the
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