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MSME is a term encompassing all the small and medium scale businesses in India. MSME stands for Micro, Small and Medium Enterprises. MSME full form is elaborated in the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006 which was the first policy enactment by the government of India aiming for the welfare of the MSME sector. With changing times, the meaning of MSME has evolved and the new classification of MSMEs is based on a more composition definition.

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What does MSME mean?

Let us begin by looking at the definition of MSMEs in India. The MSMED Act, 2006, brought in a clearer and more progressive MSME classification of small-scale businesses. According to this MSME Act of 2006, MSMEs are divided into two groups:

  • Manufacturing enterprises: Businesses involved in manufacturing goods for industries listed in the First Schedule of the Industries (Development and Regulation) Act, 1951, are manufacturing enterprises. The classification of these enterprises is based on the investment in plant and machinery.
  • Service enterprises: Firms that offer services are called service enterprises. These are categorised based on investment in equipment.

The MSMED Act classifies manufacturing MSMEs as follows:

  • Micro enterprises are businesses where investment does not exceed ₹25 lakh.
  • Small enterprises are businesses where investment is more than ₹25 lakh but do not exceed ₹5 crores.
  • Medium enterprises are businesses where investment is more than ₹5 crores but does not exceed ₹10 crore.

The MSME definition for businesses in the service sector according to the MSMED Act is given below:

  • Micro enterprises are businesses where investment in equipment does not exceed ₹10 lakh.
  • Small enterprises are businesses where investment in equipment is more than ₹10 lakh but do not exceed ₹2 crores.
  • Medium enterprises are businesses where investment is more than ₹5 crores but does not exceed ₹10 crore.

MSME Act 2020

In 2020, the Government of India changed the MSME classification criteria. Instead basing the categorisation on investment in plant and machinery/equipment, they decided to classify MSMEs based on annual turnover. This change was effected from July 1, 2020, and was done to make the criteria for classification growth oriented and to become more convenient to the new GST tax regime. The ministry removed the difference between the definition of manufacturing-based MSMEs and service-based MSMEs with the new MSME definition.

Have a look at the MSME classification according to the MSME Act of 2020:

Category Criteria of classification
Micro enterprise Net investment in plant and machinery or equipment less than or equal to ₹1 crore and net turnover less than or equal to ₹5 crores
Small enterprise


Net investment in plant and machinery or equipment less than or equal to ₹10 crores and net turnover less than or equal to ₹50 crores


Medium enterprise


Net investment in plant and machinery or equipment less than or equal to ₹50 crores and net turnover less than or equal to ₹250 crores

In 2021, the government again revised the classification of MSMEs to include retail and wholesale traders.

Importance of MSMEs to Indian economy

The Prime Minster of India described MSMEs as a “huge pillar” of the Indian economy. MSMEs contribute to employment, GDP and the socio-economic development of the country. The contribution of the MSME sector to India’s GDP is significant for the country’s economy.

Here are a few areas of the Indian economy where the MSME contribution is crucial for growth:

  • Export

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 $54.7 Billion while its exports to UAE was valued at $13.4 Billion.

  • Employment

MSMEs account for employing 40% of the human capital in India. They generate employment even in rural areas promoting industrialisation of backward regions.

  • Entrepreneurship

Many new-generation MSMEs established in the country especially after the pandemic are owned by young entrepreneurs. Also, there are numerous college graduates dipping their toes into beginning new ventures, especially technology businesses.

  • 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 enterprises offering B2B services focused on improving sustainability. This is gradually boosting India’s prowess in innovation and technology.

Features of MSMEs

The role of MSMEs in any country is to work towards the socio-economic development of the country. Here are some of the features of MSMEs that help them play a vital role in the economy:

  • MSMEs bring industrialisation to backward areas for equitable distribution of wealth.
  • Small businesses have a very high share in the export market and export various products of quality including khadi clothes and handicraft items bringing revenue to the country.
  • MSMEs generate employment in rural areas contributing to social development.
  • Most MSME products are reasonable compared to big brands. This gives consumers access to reasonable products.

How is the government helping MSMEs?

The Government of India has introduced and enacted a myriad of policies and schemes to nurture the growth of MSMEs. The government set up a Ministry of MSME for overseeing the growth of the MSME sector by introducing timely government 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).

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 (CGTSME) – CGTSME offers financial assistance of up to ₹2 crore 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.

The government has also introduced policies that give MSMEs better access to credit in the way of subsidised business loans. To apply for unsecured business loans, visit Tata nexarc. We offer business loans from leading banks and financial institutions with lowest interest rates, easy repayment terms and EMI options. You can also compare the rates of various lenders and find the right option for your emerging business on the Tata nexarc platform.

Also read: ZED certification for MSMEs: Full form, benefits, and more

World MSME day: Importance, 2023 theme and more