Micro, small and medium enterprises

Also called: MSME · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Beyond NCERT

Meaning

Micro, small and medium enterprises (MSMEs) are firms placed in one of three size groups using two tests: how much they have invested in plant, machinery or equipment, and their yearly turnover (total sales), with export sales left out of the turnover count. They matter because they are labour-intensive (they use more workers for each rupee of capital). They are the largest employer after agriculture, and they produce a large share of India's GDP, manufacturing output and exports.

Explanation

From SSI to MSME: how the definition developed

• Karve Committee (1955): its full name was the Village and Small-Scale Industries Committee. It saw small industry as a way to bring about rural development, so that work reached the villages and people did not have to move to cities for jobs.
• Small-scale industry (SSI): a unit whose investment in plant and machinery stayed at or below a ceiling (upper limit). Land and buildings were not counted.
• The ceiling kept moving:
• Rs 5 lakh in 1950.
• Rs 60 lakh before December 1997 (Rs 75 lakh for some units, such as export-oriented and ancillary units) [5].
• Rs 3 crore from 11 December 1997, following the Abid Hussain Committee [5]. In 1997 the limit for tiny units also rose from Rs 5 lakh to Rs 25 lakh [5].
• Rs 1 crore in 1999.

• From 2006, the MSMED Act limits applied.

• Why the ceiling kept changing:

• Inflation: machines cost more every year, so a fixed rupee limit slowly pushed genuine small units out of the category.
• Technology: a higher limit let small units buy better machines.

• The 1999 cut: the Rs 3 crore limit let fairly large firms take benefits meant for small ones, so it was brought down to Rs 1 crore.

• MSMED Act 2006: the "SSI" label became "MSME". The Act added a medium tier and brought services into the definition for the first time.

The three tiers and the composite test

Period	Test	Micro	Small	Medium
MSMED Act 2006, manufacturing	Investment only	≤ Rs 25 lakh	≤ Rs 5 cr	≤ Rs 10 cr
MSMED Act 2006, services	Investment only	≤ Rs 10 lakh	≤ Rs 2 cr	≤ Rs 5 cr
From 1 July 2020	Investment + turnover	≤ 1 cr & 5 cr	≤ 10 cr & 50 cr	≤ 50 cr & 250 cr
From 1 April 2025	Investment + turnover	≤ 2.5 cr & 10 cr	≤ 25 cr & 100 cr	≤ 125 cr & 500 cr

• How the composite (two-part) test works:
• A firm must stay within both limits to remain in a category.
• If it crosses either limit, it moves up to the next category.

• There is no separate table for manufacturing and services any more.

• Export turnover is excluded: exports are left out when turnover is counted, so selling abroad does not push a firm into a bigger category.

• Worked example (2025 limits):
• Firm A: investment Rs 20 cr (≤ 25) and turnover Rs 120 cr (> 100). It fails the turnover test for "small", so it is Medium.
• Firm B: investment Rs 20 cr and total turnover Rs 150 cr, of which Rs 60 cr is exports.
  • Counted turnover = 150 − 60 = Rs 90 cr (≤ 100).
  • So Firm B is Small. Its exports did not push it up a category.

Protection, reservation and "dwarfism"

• Reservation for small-scale industry: certain goods could be made only by SSI units, and big firms were not allowed to make them.
• It started in 1967 and peaked at 873 items in 1984.
• The Abid Hussain Committee (1997) recommended dereservation (taking items off the reserved list).
• The list shrank from over 800 items to 20 [2]. An Advisory Committee meeting on 20 October 2014 noted that all the remaining items could already be imported freely [2].

• Notification S.O. 998(E) dated 10 April 2015 dereserved the last 20 items, which ended the list [2].

• Why reservation failed:

• Because of the investment ceiling and reservation, a unit that grew lost its protection.
• So units chose to stay small. This is called "dwarfism".
• Small units could not gain economies of scale (costs per unit fall as output rises) or better technology, while imported goods faced no such limit [2].

• When trade opened up after 1991, they could not compete with cheap imports.

• Other concessions: lower excise duty (a tax on goods made in India) and cheaper bank loans.

In India

• Law: the MSMED Act 2006 sets the definitions. The CCEA (Cabinet Committee on Economic Affairs) approved the composite test on 1 June 2020, and it applied from 1 July 2020 [6].
• Failed changes before 2020:
• The MSMED (Amendment) Bill 2015 tried to raise the investment limits and was withdrawn in July 2018 [6].

• The MSMED (Amendment) Bill 2018 proposed a turnover-only test. It lapsed when the 16th Lok Sabha was dissolved [6].

• 2025 revision: Union Budget 2025-26 raised the investment limits 2.5 times and the turnover limits 2 times [1]. This was put into effect by Gazette Notification S.O. 1364(E) dated 21 March 2025, in force from 1 April 2025 [1]. The stated aims were economies of scale, better technology and easier access to capital [1].

• Registration:
• Udyam Registration (2020) is online, paperless and self-declared (the firm gives its own details).
• The Udyam Assist Platform (2023) brings informal micro units into the formal system.
• About 5.93 crore MSMEs were registered on the Udyam Portal as of 4 February 2025, reporting jobs for over 25.18 crore people [4].

• The RBI uses the same limits and classifies units by their Udyam Registration Certificate [7].

• Support bodies: NSIC (1955), KVIC (KVIC Act 1956), District Industries Centres (1978) and SIDBI (1990), which is the main development finance body for small industry.

• Share in the economy:
• 30.1% of GDP, 35.4% of manufacturing output and 45.73% of exports in 2023-24 [3].
• NSS 73rd round (2015-16): about 6.3 crore enterprises employing about 11 crore people. NCERT calls this employment "next only to agriculture".

• About 99% of MSMEs are micro units.

• Credit and payment support:

• Priority-sector lending (PSL): domestic commercial banks must lend 7.5% of ANBC (Adjusted Net Bank Credit, a bank's total lending after certain adjustments) to micro enterprises [7].
• CGTMSE (2000): guarantees MSE loans given without collateral (property pledged as security), for loans up to Rs 10 crore. It covers 75–90% of the unpaid amount if the borrower defaults [7].
• MUDRA (2015): Shishu, Kishore and Tarun loans for micro units.
• TReDS: an online platform where MSMEs sell their unpaid bills (invoices) to lenders for quick cash.
• ECLGS (2020): an emergency credit guarantee during COVID.
• 45-day rule: under the MSMED Act, buyers must pay within 45 days. Late payment carries interest at 3 times the RBI Bank Rate, compounded monthly [7]. Under s. 43B(h) of the Income Tax Act (from FY24), a buyer can claim the payment as an expense only if it pays the MSE within 45 days.
• Banks must decide on MSE loan applications below Rs 25 lakh within 14 working days [7].
• PM Vishwakarma (2023) supports traditional artisans. RAMP is a World Bank-backed programme to improve MSME performance.

Don't confuse with

• SSI (small-scale industry): SSI was defined by investment in plant and machinery only and covered manufacturing. MSME (since 2006) added a medium tier and services, and since 2020 it also uses turnover.
• MSMED Act 2006 test vs the 2020 test: the 2006 test used investment only, with separate manufacturing and services limits. The composite investment + turnover test, with no split, came in 2020. The 2018 Bill's turnover-only test never became law.
• Cottage industry: household production using family labour, simple tools and local materials, supported by KVIC. It is not defined by MSME investment or turnover limits.
• Ancillary unit: a small firm that supplies parts or services mainly to one big parent firm. It describes a business relationship, not a size group.

Prelims Hooks

• Karve Committee (1955) = Village and Small-Scale Industries Committee. It linked small industry to rural development. NSIC also dates from 1955, while the KVIC Act is from 1956.
• SSI ceiling path: Rs 5 lakh (1950) → Rs 60 lakh → Rs 3 crore (Dec 1997) → Rs 1 crore (1999) → MSMED Act 2006. Land and buildings were never counted.
• Reservation: began in 1967 → peaked at 873 items (1984) → Abid Hussain Committee urged dereservation (1997) → last 20 items dereserved by S.O. 998(E), 10 April 2015 [2].
• Current limits (from 1 April 2025): Micro ≤ 2.5 cr / 10 cr; Small ≤ 25 cr / 100 cr; Medium ≤ 125 cr / 500 cr. Investment limits rose 2.5× and turnover limits 2× [1].
• Trap: a firm that crosses either limit moves up a category, and export turnover is excluded from the turnover count.
• PSL: 7.5% of ANBC must go to micro enterprises. Interest on late MSE payment = 3 × RBI Bank Rate, compounded monthly [7].

Mains Points

• Protection vs growth ("dwarfism"):
• Investment ceilings and reservation rewarded firms for staying small.
• So units could not reach economies of scale or upgrade their technology.

• After 1991, they were unready for import competition, a failure the 2015 dereservation note admits directly [2]. This is useful for GS-III answers on industrial policy and the effects of LPG (liberalisation, privatisation and globalisation).

• Why the definition shifted (2006 → 2020 → 2025):

• An investment-only test was hard to verify and penalised firms that bought machines.
• Turnover is an objective test that can be cross-checked with GST and income-tax data.
• Leaving exports out removed the penalty on exporting.

• Higher limits in 2025 reduce the fear of "graduating" out of benefits. But they risk sending support to larger firms, the same worry that caused the 1999 cut.

• Credit gaps and jobs:

• MSMEs produce about 30% of GDP and 46% of exports, yet they struggle to get formal credit and are often paid late.
• PSL, CGTMSE and MUDRA help firms that lack collateral. TReDS, the 45-day rule and s. 43B(h) ease their short-term cash shortages.
• Formalisation through Udyam and Udyam Assist is the base for all of this support.
• Because MSMEs are the largest employer after agriculture, MSME policy is really employment policy. It links to Make in India, rural non-farm jobs and PM Vishwakarma.

Related concepts

• Small-scale industry
• Reservation for small-scale industry
• Cottage industry
• Industrial estate
• Ancillary unit
• MSME classification

Read more

• From SSI to MSME: Karve Committee, reservation and shifting definitions