Govt readying major MSME reforms: Why it matters for India's economy

The Centre is finalising a reform package to reduce costs, improve logistics efficiency, and strengthen innovation in the MSME sector, which contributes 30 per cent to India's GDP

The central government is considering a fresh round of reforms to strengthen the micro, small, and medium enterprises (MSMEs) sector. As one of the largest contributors to India’s economy, second only to agriculture, MSMEs form an important pillar of the country’s growth story.

 

While the government is stepping up efforts to support the sector, MSMEs continue to face long-standing challenges, including a lack of formalisation and shortages of skilled labour.

 

Let’s explore the MSME industry’s economic contribution, the key challenges it faces, and why the reforms are needed.

What’s the latest

Business Standard reported that the fresh reform exercise follows a three-tier consultation plan. Starting with cluster-level workshops, it will move to zone-level conferences across seven cities in November, and a national conference later this year. 

 

Authorities are gathering inputs from the sector on ways to reduce financial and raw material costs, improve logistics efficiency, and enhance innovation capacity.

 

The final reform package is likely to be announced by the end of the year.

Why it matters

Contributing nearly 30 per cent to India’s GDP and employing around 300 million people, the MSME sector is well poised to become a key driver of the Indian economy as the country moves toward Prime Minister Narendra Modi's vision of a "Viksit Bharat".

 

However, the sector struggles with multiple challenges. According to a SIDBI report released in May this year, some of the major challenges faced by the sector include:

• Access to timely and adequate formal credit remains limited, despite some improvements.
• Inadequate infrastructure and slow adoption of technology are holding back productivity.
• Shortages of skilled labour, skill gaps, and difficulty in attracting talent continue to constrain growth.
• Market access remains a challenge, with stiff competition from larger companies in export markets.
• Climate change and sustainability concerns are increasingly pressing, requiring a shift toward greener practices.

What’s driving the reform

The proposed reforms aim to reduce the tax and compliance burden, boost productivity, improve cost competitiveness, and leverage AI and technological innovation to strengthen manufacturing. A high-level committee, chaired by Niti Aayog member and former cabinet secretary Rajiv Gauba, has also recommended simplifying regulations. 

Previous efforts to boost MSME sector

The MSME ministry has been running outreach consultations since mid-2024 to gauge industry pain points. The Gauba committee was set up earlier this year to review procedural bottlenecks and draft proposals for the upcoming policy cycle.

 

Lack of formalisation is another key issue in the sector. According to SIDBI, many MSMEs were unregistered, missing benefits like Priority Sector Lending. Post the FY2016-17 NSSO survey, the government launched the MSME Formalisation Project to integrate informal enterprises via Udyam Registration, boosting access to support and growth.

 

Several government initiatives were launched to boost growth in the sector, including Pradhan Mantri Mudra Yojana (PMMY), StandUp India, PM Vishwakarma Scheme, and Prime Minister’s Employment Generation Programme (PMEGP). 

AI-generated image