Challenges Faced by MSMEs in India: Growth and Development Obstacles

India is home to more than 7.3 crore MSMEs, and this sector quietly powers a large share of the country’s manufacturing output, exports, and non-farm employment. Yet despite decades of policy attention, growth in this space remains uneven. Many units stay stuck at the micro level for years, unable to graduate into small or medium enterprises. Understanding why requires looking past the headline numbers and into the everyday obstacles that owners face, from patchy infrastructure to painfully slow payments. This is exactly what the “Challenges in Growth and Development of MSME Sector in India” unit sets out to unpack, and it is a topic every commerce student should understand well, since it explains why good policy intent often does not translate into ground-level results.

Why the infrastructure gap still holds MSMEs back 🔗

Physical infrastructure remains one of the oldest complaints in the MSME playbook. Many clusters, especially outside metro cities, still struggle with unreliable power supply, poor road connectivity, and inadequate warehousing. This directly affects production schedules, spoilage of perishable goods, and the cost of moving materials to market.

Digital infrastructure and slow technology adoption 🔗

The infrastructure problem is not just physical anymore. A NITI Aayog report on enhancing MSME competitiveness found that firms struggle to adopt modern technologies because of unreliable electricity, weak internet connectivity, and high implementation costs. For a small manufacturer, buying a ₹2 lakh piece of automated equipment is only useful if the power supply can actually run it consistently. This is why technology adoption across the sector remains patchy, with a wide gap between what large, export-oriented units use and what typical micro enterprises can afford or maintain.

The formalization problem 🔗

A large share of India’s MSMEs still operate informally, without proper registration, GST compliance, or documented accounts. This is a structural challenge, not just a compliance gap. An expert committee constituted by the RBI noted that formalization, access to knowledge services, and timely finance remain persistent challenges for the sector, even as institutions like RBI and SEBI continue framing supportive policies. Without formal registration, a business cannot easily access institutional credit, government tenders, or export incentives. It also becomes invisible to policymakers trying to design support schemes, which creates a vicious cycle: informal firms get less support, which makes formalizing feel less worthwhile.

The Udyam Registration portal was designed to simplify this process, but awareness and follow-through remain uneven, particularly among rural and first-generation entrepreneurs who may not see immediate benefits from registering.

Weak backward and forward linkages 🔗

Backward linkages refer to an MSME’s relationships with suppliers of raw materials and components, while forward linkages cover its connections to larger buyers, distributors, and export markets. Both tend to be weak for a majority of Indian MSMEs. Small units often buy inputs at higher prices because they lack the bargaining power of bulk buyers, and they struggle to plug into larger value chains dominated by big corporations. The RBI’s own review of the sector lists improving backward and forward linkages as one of the central recommendations for strengthening MSME resilience, alongside infrastructure development and capacity building. Without stronger integration into supply chains, MSMEs remain price-takers rather than price-setters, which squeezes their margins during any economic slowdown.

Limited access to credit, and why it persists 🔗

Access to finance is consistently cited as the single biggest constraint MSMEs face. Formal lenders often see small businesses as high-risk borrowers because of thin credit histories, lack of collateral, and inconsistent financial records. A comprehensive SIDBI study on the sector lists access to finance, technology adoption, compliance burdens, and market access among the core challenges surveyed across nearly 2,100 MSMEs in nineteen sectors. Some progress has been made through Priority Sector Lending norms and credit guarantee schemes, and the government’s 2025-26 budget introduced new credit cards and first-time entrepreneur loan schemes worth up to ₹2 crore for five lakh entrepreneurs, including women and SC/ST borrowers. But scaling these interventions to reach the tens of millions of unregistered and semi-formal enterprises remains a work in progress.

Delayed payments: a quiet liquidity crisis 🔗

Even MSMEs that do get orders often face a different problem: getting paid on time. The MSMED Act mandates payment within 45 days, and the government’s Samadhaan portal exists specifically to help small enterprises recover overdue dues. But the numbers tell a sobering story. Recent data shows that while delayed payment complaints declined by 22 percent in FY26 compared to FY21, the disposal rate fell even faster, dropping from around 33 percent to just about 4 percent. Private buyers and institutions remain the largest defaulters, followed by state governments and central public sector undertakings, with Maharashtra and Delhi together accounting for a large share of pending dues. For a small business running on thin working capital, a payment delayed by even two or three months can mean missed salaries, stalled production, or a forced loan at high interest just to stay afloat.

Data gaps and information asymmetry 🔗

A less obvious but equally important challenge is the absence of reliable, timely data on the MSME sector itself. For years, estimates of the total number of MSMEs varied widely between surveys, with the National Sample Survey pegging the figure at around 6.34 crore in 2016, while the newer Annual Survey of Unincorporated Sector Enterprises put it closer to 7.34 crore enterprises. When policymakers do not have accurate, granular data on how many MSMEs exist, where they are located, and what specific problems they face, it becomes difficult to design schemes that actually reach the intended beneficiaries. Many entrepreneurs also remain unaware of existing government schemes simply because information does not reach them, particularly in Tier-2 and Tier-3 towns.

Women and disadvantaged entrepreneurs face steeper hurdles 🔗

These challenges are not distributed equally. Women entrepreneurs, along with other disadvantaged groups, face compounded barriers when it comes to accessing credit and business opportunities. Research by the International Finance Corporation found that women-owned MSMEs in India faced a financing gap of over 70 percent relative to their needs, and India ranked among the lowest globally on the Mastercard Index of Women Entrepreneurs. More recent industry data confirms the gap has narrowed but not closed. A 2025 SIDBI-Crisil study found that only 76 percent of women-led enterprises had accessed formal credit compared to 84 percent of male-owned businesses, with women facing the widest credit gap of any demographic segment tracked in the study.

Part of this stems from structural issues, such as women having limited ownership of land or other assets that banks typically demand as collateral, alongside weaker formal bookkeeping and shorter documented transaction histories in many women-led businesses. Socio-cultural factors compound the problem too. Unpaid domestic responsibilities fall disproportionately on women in India, which limits the time and mobility available for building and scaling a business. Government schemes like Stand-Up India and the PM Employment Generation Programme specifically target this gap, but awareness of these schemes among the entrepreneurs who need them most is still limited.

What needs to change: policy and institutional support 🔗

None of these challenges exist in isolation. Poor infrastructure worsens the credit problem, since lenders see unreliable operations as higher risk. Lack of formalization keeps businesses out of the data systems that shape policy. Delayed payments undo whatever credit access a business does manage to secure. This is exactly why the RBI’s expert committee stressed that government interventions have tended to be supply-side oriented and not always responsive to actual demand-side needs on the ground. Targeted interventions, such as cash-flow-based underwriting instead of collateral-heavy lending, faster dispute resolution mechanisms, cluster-level infrastructure upgrades, and better data collection through Udyam and ASUSE, could meaningfully shift outcomes. Strengthening institutional support specifically for women and first-generation entrepreneurs, rather than treating them as a subset of a generic scheme, also appears necessary based on the persistent gaps in the data.

For commerce students, this topic is a useful lens into how economic policy interacts with real business behaviour. Good intentions on paper, whether in the MSMED Act or the Union Budget, only translate into growth when infrastructure, credit systems, and dispute resolution mechanisms work together on the ground.

What do you think? Which of these challenges, weak infrastructure, delayed payments, or the credit gap, do you think has the biggest impact on whether a micro enterprise can grow into a small or medium one? And do you think formalization schemes like Udyam Registration go far enough to bring informal businesses into the mainstream economy?

References

1. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2126063&reg=48&lang=2
2. https://dcmsme.gov.in/Report%20of%20Expert%20Committee%20on%20MSMEs%20-%20The%20U%20K%20Sinha%20Committee%20constitutes%20by%20RBI.pdf
3. https://www.rbi.org.in/commonman/Upload/English/speeches/PDFs/MSME06032020.PDF
4. https://www.sidbi.in/uploads/publicationreport/Understanding-Indian-MSME-sector-Progress-and-Challenges%20-Unabridged-Version-07-07-2025.pdf
5. https://www.sidbi.in/uploads/Understanding_Indian_MSME_sector_Progress_and_Challenges_13_05_25_Final.pdf
6. https://www.business-standard.com/economy/news/msme-delayed-payment-complaints-fall-disposal-rate-falls-faster-126060800627_1.html
7. https://www.orfonline.org/expert-speak/women-entrepreneurs-access-to-credit
8. https://yourstory.com/2025/05/women-entrepreneurs-msme-credit-gap-india-2025