
The transformation of India’s micro, small and medium enterprises or MSMEs represents perhaps the most significant opportunity for achieving inclusive growth in this decade.
With 63.4 million enterprises contributing 30 percent to the national GDP and employing over 100 million people, this Indian sector’s economic footprint is larger than the entire economies of, say, Thailand or Sweden. Yet, its potential remains significantly underused, primarily due to structural constraints that the upcoming Budget 2025 must address.
Closing the financing gap: The U K Sinha Committee estimated this gap to be Rs 20-25 lakh crore, about 7.3 percent of the GDP. Access to credit stands at 14 percent, significantly trailing China’s 37 percent and the US’s 50 percent.
Germany’s KfW model offers a relevant framework—it operates as a government-owned development bank, providing credit guarantees and technical assistance, and acting as a second-tier lender through commercial banks. This model reduces lender risks, promotes private-sector involvement, and supports innovation while maintaining low default rates.
India could benefit from expanding the Credit Guarantee Fund Trust for Micro and Small Enterprises to include larger loans and differentiated guarantees like the KfW does. Incorporating financial aid with capacity-building initiatives, using digital infrastructure for secure data sharing, and collaborating with fintech firms to offer innovative lending solutions would help bridge the financing gap and promote sustainable growth.
Digital transformation: The post-pandemic era highlights the urgent need for digital adoption among Indian MSMEs, with current rates at 20 percent, compared to Taiwan’s 91 percent and Singapore’s 95 percent. According to one report, of the 64 million MSMEs in India, only about 7.7 million have reached digital maturity.
Digital transformation is essential for improving productivity and competitiveness. Singaporean SMEs’ Go Digital programme, launched in 2017, achieved 95 percent adoption through subsidies. Japan’s targeted technical centres enabled MSMEs to access advanced manufacturing technologies by sharing infrastructure and reducing capital burdens. India should establish 100 digital transformation centres in key industrial clusters to replicate this and partner with IT firms for subsidised tools and training. Enhancing platforms like the government e-marketplace can encourage MSMEs to adopt digital solutions.
Market access: This is a significant challenge for Indian MSMEs, which contribute 49 percent of the country’s exports but are underrepresented in global value chains. We should create an export development fund and a digital platform for market intelligence using tools like the directorate general of foreign trade (DGFT) portal.
The World Bank in 2019 highlighted the potential of alternative credit-scoring models using non-traditional data—like trade credit and utility payments—to enhance access for underserved businesses. In the US, lenders have used such data to assess the creditworthiness of small exporting businesses, leading to quicker loan approvals. Implementing a similar approach in India by focusing on export-specific metrics could enhance risk assessments, streamline loan processing, and empower export-oriented MSMEs.
Simplifying compliance: The formalisation of MSMEs should be prioritised in Budget 2025. Simplifying tax and compliance processes will encourage more MSMEs to formalise. Currently, MSMEs deal with complex filing requirements, which raise operational costs.
Learning from Brazil’s SIMPLES programme, India could create a unified system integrating various taxes into a single filing with simplified rates and pre-filled forms. Existing platforms like GST Sahaj and Udyam can further facilitate this process. Additionally, addressing the “missing middle” phenomenon—where small firms hesitate to grow due to regulatory complexities—can be achieved through a three-year transition window for those surpassing thresholds, accompanied by tax benefits to ease new compliance burdens.
Real-time monitoring: India’s MSME sector needs a cohesive monitoring framework to assess its performance and effectively evaluate policy interventions. Inspired by Taiwan’s SME Development Index, India should create a centralised MSME Performance Dashboard using existing platforms like Udyam and Champions portal. The dashboard could track key metrics such as credit flow (via Sidbi’s MSME Pulse), technology adoption, market access and export performance (through DGFT), and employment generation and skill development.
To implement this, the government should establish a high-powered MSME transformation council, responsible for coordinating data collection and analysis. This would leverage digital tools for real-time monitoring.
The fiscal implications of these interventions must be viewed through the lens of potential returns. Malaysia’s SME Masterplan provides empirical evidence of such returns: similar interventions increased their MSME contribution to GDP from 32 percent to 38 percent in five years.
The success of these interventions hinges on coordinated implementation across central and state governments, financial institutions and industry bodies. By addressing these issues, Budget 2025 can position MSMEs as the cornerstone of India’s economic growth.
(Views are personal)
Gourav Vallabh | Professor of finance, XLRI Xavier School of Management