StatsGuru: Productivity gap continues to hinder India's MSME growth

The Union Budget 2026-27 has placed the Micro, Small and Medium Enterprises (MSMEs) at the heart of India’s growth by proposing a three-pronged approach to provide equity support, liquidity and access to expertise. The sector covers over 74.7 million enterprises and stands as the second-largest employer after agriculture by employing 328.2 million people.

 

India’s recent and proposed trade deals such as those with the United States of America, the United Kingdom, Australia, the European Free Trade Association, United Arab Emirates and the European Union are opening new doors for MSMEs by reducing tariffs on textiles, leather, home décor and toys, etc. MSMEs accounted for 48.58 per cent of India’s merchandise exports in FY25.

 

Nearly 99 per cent of MSMEs are micro enterprises, mostly male-owned and trading-driven (Chart 1). 

 

MSMEs accounted for 31 per cent of GDP in FY24 and the share of bad loans in MSME lending has more than halved in four years (Chart 2). 

 

Uttar Pradesh overtook Maharashtra in MSME employment in FY25 and total employment generated has nearly tripled over the past five years (Chart 3). 

 

The Northeast leads in women-led MSMEs, with all five top states from the region, though the all-India share has dipped to 31 per cent as of July 2025 (FY26) after peaking at 51 per cent in FY24 (Chart 4). 

 

Maharashtra has consistently led in bank credit to MSMEs, though its share slipped in FY25. At the same time, total bank credit more than doubled in the past five years (Chart 5). 

 

India’s MSMEs have a three-fourths productivity gap with large firms — at 74 per cent in 2024. The advanced world had a much smaller gap, though some emerging economies had wider gaps (Chart 6).