MSMEs, Startups and Disinvestment

Micro, Small and Medium Enterprises (MSMEs)

Their place in the economy:

• About 6.3 crore enterprises, according to the NSS 73rd round (2015–16). Over 6 crore were registered on the Udyam portal by 2025.
• Employ about 25–30 crore people, the second-largest source of jobs after agriculture.
• Contribute about 30% of GDP and about 45% of exports.
• Over 99% are micro enterprises.

Legal framework: the MSMED Act 2006. Classification was revised in 2020 to a composite criterion of investment in plant and machinery and turnover, with no distinction between manufacturing and services.

The 2025–26 Budget raised the limits:

The earlier (2020) limits were ₹1/10/50 crore for investment and ₹5/50/250 crore for turnover.

Registration: Udyam Registration (from July 2020) is free, paperless and Aadhaar-based. The Udyam Assist Platform (2023) brings informal micro enterprises into the formal net.

Problems of MSMEs

1. Credit gap: the formal credit gap is estimated at about ₹20–25 lakh crore (SIDBI/IFC). Banks see small firms as risky, because of the lack of collateral and data.
2. Delayed payments: large buyers pay late.

• The MSMED Act requires payment within 45 days.
• Section 43B(h) of the Income-tax Act (from 2024) disallows deductions for payments to micro and small suppliers delayed beyond the limit.
• TReDS, the Trade Receivables Discounting System (2014), lets MSMEs sell their invoices.
• MSME Samadhaan handles payment complaints.

1. Technology and productivity: low scale, outdated equipment and poor quality certification.
2. Market access: competition from imports, especially from China.
3. Informality: most are unregistered.
4. Regulatory burden: compliance, inspector raj and GST compliance for small firms.
5. Skills and infrastructure: power and logistics costs.

Support schemes

Credit:

• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): collateral-free loans, with the cover raised to ₹10 crore (2025).
• Emergency Credit Line Guarantee Scheme (ECLGS): a COVID-era guarantee of about ₹5 lakh crore, credited with saving many firms.
• MUDRA loans.
• PSL for MSMEs.
• Self-Reliant India Fund (equity, 2021).
• A credit guarantee scheme for MSME manufacturing loans (2024).
• A new credit assessment model using digital footprints instead of asset-based appraisal (2024).

Markets:

• Government e-Marketplace (GeM), 2016.
• A public procurement policy requiring 25% procurement by central ministries and CPSEs from MSEs, with sub-targets of 4% from SC/ST and 3% from women entrepreneurs.

Technology and clusters:

• SFURTI (traditional industry clusters);
• Cluster Development Programme;
• ZED (Zero Defect Zero Effect) certification;
• RAMP (Raising and Accelerating MSME Performance, a World Bank-supported programme).

Traditional sectors:

• PM Vishwakarma (September 2023): covers 18 trades, providing training, a toolkit grant of ₹15,000 and collateral-free loans of up to ₹3 lakh at a concessional rate;
• One District One Product (ODOP).

Startups

Startup India (January 2016):

• recognised startups get tax benefits (Section 80-IAC, a three-year tax holiday for eligible startups), self-certification under labour and environment laws, and faster patent examination;
• the Fund of Funds for Startups (FFS), ₹10,000 crore, managed by SIDBI; a new fund of ₹10,000 crore was announced in 2025;
• the "angel tax" (Section 56(2)(viib)) was abolished from 2024–25.

The ecosystem:

• India is the world's third-largest startup ecosystem, after the US and China.
• Over 1.5 lakh DPIIT-recognised startups by 2025.
• About 100–120 unicorns (privately held, valued at $1 billion or more).
• Hubs: Bengaluru, Delhi-NCR and Mumbai. About half of recognised startups are in tier-II and tier-III cities.

Issues:

• the funding winter of 2022–24;
• governance failures (e.g. edtech);
• reverse flipping, as startups that had domiciled abroad move back to India;
• the need for deep-tech funding, addressed by the 2025 Deep Tech Fund of Funds.

Disinvestment and PSU reform

Meaning: selling part or all of the government's stake in public sector enterprises.

• Minority stake sale: the government keeps control.
• Strategic disinvestment: control is transferred.

Why disinvest?

• raise revenue;
• improve efficiency;
• bring in market discipline;
• let the state focus on core functions.

Institutional framework:

• the Department of Investment and Public Asset Management (DIPAM), renamed in 2016;
• the New Public Sector Enterprise Policy (2021). Strategic sectors (atomic energy, space and defence; transport and telecom; power, petroleum, coal and minerals; banking, insurance and financial services) keep a bare minimum public presence. In non-strategic sectors, PSEs are to be privatised or closed.

Milestones:

• the Air India sale to the Tata group (completed January 2022), the first major strategic sale after 2003–04;
• the LIC IPO (May 2022);
• the IDBI Bank strategic sale process, under way in 2025.

Performance: disinvestment has repeatedly missed budget targets. After 2023–24, the Budget stopped giving a separate target and folded it into "miscellaneous capital receipts".

Other routes:

• CPSE Exchange Traded Funds and the Bharat 22 ETF;
• buybacks;
• asset monetisation through the National Monetisation Pipeline.

Concerns:

• undervaluation;
• selling "family silver" to fund current spending;
• job losses;
• social objectives of PSUs, such as regional development.

Analysis: the "missing middle"

The problem: India's firm-size distribution is skewed. Many tiny firms and a few large ones, with very few medium-sized enterprises.

Causes:

• regulatory thresholds (labour laws, tax, MSME benefits) discourage firms from growing;
• credit constraints and weak contract enforcement.

Fixes:

• graduated benefits so that small firms do not lose all support on growing;
• cash-flow based lending (the Account Aggregator and OCEN frameworks);
• cluster infrastructure and export linkage.

Common prelims traps

• Since 2020 there is no separate MSME definition for manufacturing and services.
• TReDS is for invoice discounting, not equity.
• The public procurement target from MSEs is 25%.
• Strategic disinvestment means a transfer of control.

Practice: Mains question

*"MSMEs are the backbone of the Indian economy, but they remain trapped in low productivity." Discuss the reasons and suggest measures. (250 words)*

The Khadi and village industries sector

The Khadi and Village Industries Commission (KVIC) is a statutory body set up in 1956. It promotes khadi and village industries, and its sales passed ₹1.5 lakh crore in 2023–24. It also runs the Prime Minister's Employment Generation Programme (PMEGP), a credit-linked subsidy scheme for new micro enterprises, created in 2008 by merging the PMRY and REGP schemes.

Quick self-test

1. *Can a services enterprise register as an MSME?* Yes. Since 2020 the same limits apply to manufacturing and services.
2. *Under which section are delayed payments to micro and small suppliers disallowed as a tax deduction?* Section 43B(h).
3. *What is a unicorn?* A privately held startup valued at $1 billion or more.
4. *What does "strategic disinvestment" mean?* Sale of a majority stake together with transfer of management control.

Key term

Missing middle: the shortage of medium-sized firms in India's enterprise distribution. Firms stay small to avoid regulatory thresholds, so the economy loses the productivity gains that come from scale.