Introduction
Micro, Small, and Medium Enterprises (MSMEs) form the backbone of the Indian economy, providing from employment and exports to GDP. However, MSMEs are restricted by several obstacles that inhibit ease of doing business, despite their potential. They often grow slowly due to complex regulatory frameworks, inadequate access to credit, and bureaucratic red tape. Infrastructure issues, little technological adoption and problems accessing markets limit their competitiveness, among others. Government initiatives like Udyam Registration and credit schemes are there to assist MSMEs, but gaps in implementation obstacles abound. India’s micro, small and medium enterprises (MSMEs) are caught in a paradox.
They drive 30% of the GDP, employ 110 million people and act as the backbone of rural and urban economies. But for every Agra-based MSME owner, like Rajesh, who struggles to keep his toy factory in business by paying 24% interest loans from money lenders, the growth dream appears as distant as ever. According to the now-defunct World Bank’s Ease of Doing Business Index, India stood 63rd globally as of 2020, but ground realities tell a much gloomier story: MSMEs are short by $530 billion in credit, invest 500+ hours a year in compliance and lose 15–20% of profits in infrastructure malfunctions such as power cuts and bad roads[1].
These barriers are critical to understand in order to generate a more business-friendly environment that encourages innovation and entrepreneurship. In this blog, we look at the key challenges of MSMEs in India and search for policy interventions that can ease operations, facilitate access to finance and to run the business in a more efficient manner.
Financial Barriers: The $530 Billion Credit Gap
What if you needed funds to scale your business but banks rejected you? This is the daily battle of millions of MSMEs. An astonishing $530 billion credit gap exists in a sector where only 14% of 63 million MSMEs have availed of loans from formal financial institutions[2]. Banks want collateral such as property or machinery, which small entrepreneurs can hardly provide. Even with some loans approved, the steep interest rates (12–18%) and convoluted paperwork make repayment intimidating.
Schemes such as Pradhan Mantri Mudra Yojana aim to help bridge the gap, but many MSMEs are either unaware or intimidated by the process. Delayed payments exacerbate the crisis — MSMEs cater to large firms or government projects and typically wait for 90–180 days for the payment to come through, thereby driving them to seek expensive informal loans to meet their obligations.
Regulatory Maze: Complex Compliance And Bureaucracy
The recommended path to start a business in India resembles a maze. There are 15+ approvals you need in order to open a bakery in Mumbai including a food safety license, fire clearance, GST registration. Each step is accompanied by paperwork, delays and often bribes. Tax compliance is also taxing—MSMEs devote over 500 hours a year on GST filings, while incurring penalties for minor mistakes.
Mixing it with your word, in budget 2025, Jan Vishwas Bill 2.0 has been in the news to dispense with unconventional regulations, yet the movement hasn’t been quick. For example, 44 central and 150+ state laws govern labormaking it an extremely convoluted landscape even for an old hand in the trade. The infraction — an owner of a Chennai garment factory inadvertently overstepped overtime — and a steep fine paid highlight the intricacy[3].
Technological Lag: Stuck In The Analog Era
MSMEs trapped in time as India races toward digital transformation Just 21% have used digital tools for inventory management or similar tasks, and 68% still rely on manual record-keeping3. Offline tracking errors cost a Jaipur textile unit 15% of orders every year. Upgrading to cloud-based systems costs ₹50,000/month, beyond the reach of most. There’s also the fear of technology. A sweetshop owner in Kolkata was hesitant to embrace digital payments, fearing a scam, and lost younger clientele who preferred UPI. Budget 2025 provides subsidies for tech adoption, but rural MSMEs do not have internet access to benefit[4].
Skilled Labor Shortage: The Missing Workforce
MSMEs are yet to tap into India’s demographic dividend. The business world is being forced to retrain workers due to a 57% skill gap in manufacturing and IT. An auto parts boiler factory in Coimbatore spends ₹1.2 lakh a month training its employees in CNC machines, only to see them leave for corporate jobs with better pay. Aiming to train 5 million workers by 2026, the Skill India Mission’s programs rarely match what industry needs. For example, pottery units in Lucknow need artisans trained in modern ceramics, but training centres continue to focus on traditional techniques[5].
Market Access: Input And Output Challenges
Another major barrier for MSMEs is market access — both for inputs and outputs. At the input side many of them find it difficult to buy raw materials at pricelist because of their small size and lack of bargaining power, as well as their inability to buy in bulk. On the output side, expansion into larger markets and building stable customers may require marketing capabilities, digital presence and distribution networks, which many MSMEs do not have. Marketing was identified as the weakest parameters in the Ease of Doing Business environment for manufacturing MSMEs due to lack of government support. Many ground-breaking Products and Services by MSME do not reach or compete with large enterprises that have their footprint in the market due to the lack of marketing support.
Institutional Gaps: Awareness And Coordination Challenges
At the institutional level, one of the important challenges is that of coordination between the Central Government and state governments. This has resulted into different implementation of schemes and programs, which, however, has not complemented the efforts of various schemes launched by the Government for MSMEs[6]. Compounding this complexity, MSMEs in India are not a uniform section, it consists of a wide disparity of micro-enterprises to tech start-ups like small and medium businesses, each with distinct needs and challenges.
Moreover, MSME owners do not know what supporting schemes are available for them. Consequently, MSMEs struggle to harness their growth and developing adequately[7]. This information asymmetry creates a situation where even well-designed policies fail to reach their intended beneficiaries, rendering them ineffective in practice despite their potential merit.
Regulatory And Compliance Burdens
However, one of the larger issues from MSME in India would be to bridging the gap between registrations, licenses and approvals to incorporate and run a business. While the Udyam Registration process has been implemented by the government to simplify the process of MSME registration, a lot of businesses still get entangled in bureaucratic hurdles by having to deal with multiple departments. Under the backdrop of the Goods and Services Tax (GST), the objective was to alleviate indirect taxation through one type of tax.
But small businesses face challenges with compliance because of complicated filing processes and changing tax laws. Fourty-five per cent of MSMEs have cited GST compliance as one of their biggest challenges, according to a survey conducted by the Federation of Indian Chambers of Commerce & Industry (FICCI). It has been argued in India that its labour laws are quite inflexible and complicated to follow which makes it extremely difficult especially for small businesses to comply with the provisions.
Conclusion
Ensuring ease of doing business for MSMEs in India will be a multi-dimensional journey requiring the active participation of all stakeholders. Nonetheless, enabling these enterprises requires a multifaceted rebalancing of regulation, access to finance, operational difficulties, market access and institutional support systems. Strengthening MSMEs will be the need of the hour with an eye on India’s vision of becoming a developed nation (Viksit Bharat) by 2047. The need of the hour will be a holistic policy approach, keeping in mind the large and heterogeneous nature of MSMEs in India. Advantages must be signaled with region-specific incentives and a cooperative federalism framework to promote overall-growth[8].
Micro, Small and Medium Enterprises (MSMEs) are critical to India’s economic development through providing employment, exports and innovation. But despite their enormous potential, they still have considerable impediments to ease of doing business. Bureaucratic red tape, complex taxation, financial constraints and delayed payments are putting MSMEs in a difficult position to flourish. Their competitiveness is also hampered by infrastructure deficits, low levels of digital adoption, and challenges expanding to new markets.
Although schemes like Udyam Registration, CGTMSE, and MSME Samadhan by the government have tried to create a better ecosystem for business, issues such as the implementation of these schemes and knowledge about them still exist. MSMEs cannot attain sustainable growth without more streamlined regulatory processes, better access to credit, and improved infrastructure. Unlocking the full potential of automation requires a multifaceted approach. By simplifying compliance, increasing financial support, facilitating investment in digitalization, and managing supply chain efficiency, we can empower MSMEs in such a manner that they can compete on a global stage. By creating a place for doing business, India can make its MSME sector a significant driver for long-term growth and job creation.
[1] Sandeep Soni, ‘$530 billion massive credit gap in India’s MSME sector out of $819 billion addressable demand’ (Financial express, 24 March, 2024)< https://www.financialexpress.com/business/sme-msme-fin-530-billion-massive-credit-gap-in-indias-msme-sector-out-of-819-billion-addressable-demand-report-3031372/> accessed 24 March, 2025
[2] Ibid
[3] Renu Suresh, ‘MSME New Definition’ (India filings, 22 March, 2025)< https://www.indiafilings.com/learn/msme-new-definition/> accessed 24 March 2024
[4] Grant Thorton, ‘Compendium of Schemes for MSMEs: Government of Andhra Pradesh and Government of India’ (APIIC, NOT SPECIFIED)< https://apiic.in/wp-content/uploads/2021/10/Compendium-of-MSME-Schemes.pdf> accessed 25 March 2025
[5] Protium, ‘5 Strategic Ways MSMEs Can Bridge the Skill Gap and Boost Revenue by 24%’ (LinkedIn, 18 March 2025)< https://www.linkedin.com/pulse/5-strategic-ways-msmes-can-bridge-skill-gap-boost-revenue-pigvc> accessed 25 March 2025
[6] Assocham, ‘MSMEs Facing Challenges in Doing Business’ (ESGROW, November 2024)< https://egrowfoundation.org/site/assets/files/2440/msme_report-final_version.pdf> accessed 25 March, 2025
[7] Ibid
[8] Ibid
Author Name- Divyanshu is a 2nd-year B.Com Llb at Lloyd School of Law
