MSME full form stands for Micro, Small and Medium Enterprises and refers to manufacturing and services businesses, wholesalers and retailers based on their annual turnover and investment in plant and machinery. The concept and definition of MSME was first introduced by the government through the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, that outlines the policies and framework for the development and promotion of the MSME sector. With changing times, the scope of the MSME sector has evolved and the new MSME meaning is based more on a holistic composite approach.

In the next sections, we take a more detailed look at what is a MSME, who is eligible under MSME, classification of MSME, list of businesses under MSME and more.

For more information, visit the official website: //msme.gov.in/

MSME full form

Micro, Small and Medium Enterprises

MSME is an acronym for manufacturing and services sector businesses in India that are categorised as micro, small and medium enterprises, based on their annual turnover and investment in plant and machinery.

What do you mean by MSME? MSME meaning and definition

Let us begin by understanding MSME meaning and how it is defined.

MSME or Micro, Small and Medium Enterprises refers to manufacturing and services businesses involved in the production, processing and preservation of goods and services.

Which company is called MSME?

MSMEs are categorised under two categories mainly:

• Manufacturing enterprises: Those involved in the production of tangible goods and commodities across specific industries. As per the MSMED Act 2006, these refer to businesses involved in manufacturing goods for industries listed in the First Schedule of the Industries (Development and Regulation) Act, 1951. (Also read: Manufacturing sector in India)
• Services enterprises: Those involved in providing intangible services. These can be for other organisations, small businesses, or to direct consumers.

In 2021, the MSME definition was expanded to include retailers and wholesale traders. This allowed nearly 2.5 crores retailers and wholesalers to undertake MSME registration on the Udyam portal and avail government benefits especially priority sector lending as per RBI guidelines.

MSME examples

There is a list of businesses under MSMEs for manufacturing and services sectors, based on the type of products and services they offer. The classification however is based on their annual turnover and investment in plant and machinery.

Some of the businesses that can be considered as examples for MSMEs are:

Examples of manufacturing sector MSMEs:

• Leather products manufacturing, e.g., bags, belts, wallets, jackets
• Automotive and bicycle parts manufacturing
• Textile and garments manufacturing
• Furniture and wood products, e.g., tables, chairs, beds, cupboards
• Ceramics and glass products manufacturing, e.g., roofing tiles, glass flooring, utensils
• Engineering and metal fabrication products

Examples of services sector MSMEs:

• IT solutions and consultancy services
• Call centre services
• Testing laboratories and X-ray clinics
• Laundry and dry cleaning services
• Training and educational institutions

There are a host of other activities for manufacturing products and services that are considered as MSMEs.

What is the new classification of MSME companies?

The new MSME classification of companies is based on turnover and investment. The old definition of MSME was based on the investment made by the company in plant and machinery. This naturally made the definition complex as the nature of investment for manufacturing and services-based businesses are different. It also hindered their growth.

As such, under the Aatmanirbhar Bharat Abhiyan notification (1 June 2020), a composite, new classification of MSMEs in India was designed to make it more suitable for current times.

The highlights of the MSME classification of 2020 are:

• It will be based on the annual turnover and investment made in plant and machinery and equipment
• A single, composite classification will be applicable to all businesses across manufacturing and services sectors

MSME criteria for classification:

The below table illustrates the new composite MSME classification based on annual turnover and investment in plant and machinery/equipment for both manufacturing and services businesses.

*Source: MSME website: //msme.gov.in/know-about-msme

As of 2021, wholesale traders and retailers are also included in the definition of MSMEs.

Who is eligible under MSME?

Now that we understand MSME full form and the classifications for a MSME, let’s take a look at MSME eligibility.

The following type of companies are eligible for MSME registration on the Udyam portal (provided they meet the turnover and investment requirements and limits mentioned above):

• Startups, entrepreneurs and business owners
• Sole proprietorship
• Private limited companies
• Partnership firms and LLPs
• Self-Help Groups (SHG), Trusts, and Co-operative societies

Note: You cannot apply for MSME registration as an individual (i.e., has to be through a business entity)

Who is not eligible for MSME?

While there is a list of companies that can be considered as MSMEs, there are others that are not included in the list of eligible companies for MSMEs. Some of these include:

• Fishing and aquaculture businesses
• Forestry and wood harvesting businesses
• Activities of extraterritorial organisations and bodies
• Gambling and related ventures
• Businesses on domestic staffing for households

It is recommended that as a business owner, before you start a business, check the official MSME website to clarify if your business meets the basic MSME eligibility criteria or not.

What are the main features of MSMEs?

There can be little debate on the contribution of MSMEs to India’s GDP and the overall role of MSMEs in rural development. Listed below are some of the key MSME features that make them instrumental to socio-economic development across rural and urban settings.

• Industrialisation and economic development: The main feature of MSMEs is that they contribute to industrialisation and economic development of underdeveloped and backward areas. They also assist in providing training and technology support, which in turn results in better distribution of wealth and generation of new employment opportunities.
• Export opportunities: Small businesses, such as khadi, coir, traditional handicraft and handloom work by artisans – these are highly in-demand in global markets. MSMEs play a significant role in their production and export (through access to new markets), in turn generating revenue and driving international trade.
• Employment generation and entrepreneurship: MSMEs can generate new employment opportunities for artisans, skilled workers, and even promote entrepreneurship. Moreover, through various MSME training centres and programmes, MSMEs can also enable skill enhancement to upskill rural workers and make them more employable.
• Fair competition: MSMEs can help small businesses price their products competitively and compete with bigger brands and global markets. This not only promotes fair competition but also encourages business to innovate, prioritise quality of products and services, and also gives consumers more options to choose from at the best prices.

What is the importance of MSMEs in Indian economy?

We understand that MSMEs are vital for India’s socio-economic growth. Not only do MSMEs contribute to India’s GDP, they also general employment, and facilitate export.

Here are some of the prominent contributions of the MSME sector that highlights MSME importance in India:

• Exports: The share of MSME exports in the country’s total exports were recorded at 42.67% as of August 2022. According to a news report, in FY22 Indian MSME exports to US alone was USD 54.7 billion while its exports to UAE was valued at USD 13.4 billion.
• Employment generation: MSMEs account for employing 40% of the human capital in India. They generate employment even in rural areas promoting industrialisation of backward regions. There are several innovative schemes and MSME training courses available for MSME businesses to avail to enable them to upskill and stay relevant.
• Entrepreneurship: Many new-generation MSMEs established in the country especially after the pandemic are owned by young entrepreneurs. This is not only in urban India, where many technology enthusiasts are venturing into tech-based startups, but also in the rural sectors, with focus on agri-based products, logistics, food processing, handloom and similar. This not only helped to moderate mass movement to the cities, but also enabled to build more self-reliant rural economies.
• Innovation: A fair share of new age small businesses is B2B automation companies that bring in innovative ideas to automate machinery and processes. There are also small companies offering B2B services focused on improving sustainability. This is gradually boosting India’s prowess in innovation and technology.

How is the government helping MSMEs?

The Government of India has introduced numerous policies and credit facility schemes to nurture the growth of MSMEs. The Ministry of MSME was set up exclusively for overseeing the growth of the MSME sector through MSME schemes that can help them alleviate their challenges.

The MSME Ministry heads five statutory bodies; KVIC, Coir Board, NSIC (National Small Industries Corporation) and NI-MSME (National Institute of Micro, Small and Medium Enterprises) and Mahatma Gandhi Institute of Rural Industrialisation (MGIRI).

The ministry has introduced a comprehensive range of common facilities, technology support services, marketing assistance, etc., to MSMEs through its network of 30 Micro, Small and Medium Enterprises-Development Institutes (MSME-Dls).

They have set up 28 MSME-Dls, four MSME Testing Centres (MSME-TCs), seven MSME-Testing Stations (MSME-TSs), two MSME-Training Institutes (MSME-Tls) and one MSME-Technology Development Center-Hand Tools (MSME-TDC-Hand Tools).

Also read: MSME loan schemes – How to apply in 2024

What are some recent government MSME schemes and policies?

Recently, MSME Minister of India, announced the launch of FIRST, the Forum for Internet Retailers, Sellers, and Traders. This is a program to educate MSMEs about the opportunities that will help them go digital and become self-reliant.

According to a new report, over 17,200 Indian enterprises across the retail, trade and commerce sector, selling goods and services, have already registered with the forum.

Here are some of the other government schemes for MSMEs:

• MSME innovative scheme: The scheme seeks to increase innovation among MSMEs by providing them with the right financial and other resources.
• Credit Linked Capital Subsidy Scheme (CLCSS): This scheme to seeks to facilitate technology upgrades by providing upfront capital subsidy to small scale industry units, including tiny, khadi, village and coir industrial units.
• Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE): CGTSME offers financial assistance of up to ₹5 crore (recent update from initial ₹2 crores limit) to new businesses and start-ups.
• A Scheme for Promotion of Innovation, Rural Industries and Entrepreneurship (ASPIRE): A program that aims to establish technology networks and incubation facilities and promote entrepreneurship and innovation in the agricultural and rural sectors.

What is the new rule of 45 days payment?

In recent times, when it comes to MSME payment terms to suppliers and vendors, a new 45 days payment rule for MSMEs have been incorporated and to be implemented from 1 April 2024.

This rule makes it mandatory for businesses to make payments to MSME businesses within 45 days of receiving the goods and services. This rule will ensure that MSMEs receive timely payments and have access to finance for daily working capital challenges and cash flow.

This new 45 day rule for MSMEs, under Section 43(B) of the Income Tax Act, also makes it clear that if businesses are however unable to make the payments within 45 days, then the amount will be considered as ‘profits’ and they will not be able to claim deductions and pay the required taxes accordingly.

The government has also introduced policies that give MSMEs better access to credit in the way of subsidised business loans.