What Is MSME and Its Role in the Economy

What is MSME? Its Definition and role in Economy

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By Pine Labs | August 01, 2022

Micro, Small and Medium Enterprises (MSMEs) have the potential to be key employment generators and help achieve the goal of taking the Indian economy to US$ 5 trillion in the next five years. Most companies are now looking to create solutions with new and emerging technologies in this high-growth sector. The MSMEs sector supplies goods and services to large industries and is the backbone of exports from India. As the MSME full form suggests, it covers different types of enterprises based on their size - micro, small and medium. India has more than nine crore MSMEs, accounting for nearly 40% of the exports from India.

The pandemic has pushed MSMEs to digitise. Innovative FinTech solutions can be the key to taking MSMEs to the next level and help India become a global economic powerhouse.

MSMEs have their own set of challenges to their growth journey. One of these is the timely availability of required funds. 80% of MSMEs lack access to formal lending channels. The need for credit is more during seasonal spikes, like festive seasons. Small companies in retail sectors need to be prepared to take growth advantages during important festive seasons as consumers look for high-value purchases.

Let us understand more about MSMEs.

What is meant by MSME?

MSMEs were introduced under the MSMED (Micro, Small and Medium Enterprises Development) Act, 2006. The full form of MSME is Micro, Small, and Medium Enterprises.

Key Features:

As the above MSME definition shows, MSMEs are primarily involved in producing, manufacturing, processing, or preserving goods. For more clarity on 'What is MSME?', consider the following essential elements of MSMEs -

  • MSMEs aid workers' and artisans' welfare by increasing employment opportunities and providing loans and other services
  • These enterprises encourage entrepreneurship and project technical training centres
  • They support infrastructure development, technological development, and the sector's modernisation
  • They assist the domestic and export markets
  • They provide modern testing facilities
  • They provide quality certification services

Addition Under MSMEs

Detailed guidelines on MSMEs are updated intermittently. The Indian government has redefined MSMEs in the Atmanirbhar Bharat package after 14 years since the MSME Development Act, 2006. The primary objective of refining the MSMEs was to ease business activities, attract more investments, and create more employment in the MSME sector.

As per the new definition of MSME, the Ministry of MSME now includes both retail and wholesale trade under MSME to strengthen the sector and boost economic growth. With such inclusions under MSME, the ministry was intended for the limited purpose of Priority Sector Lending from banks under the regulations of the Reserve Bank of India (RBI).

What is the MSME limit for the Classification Criterion?

As part of the Aatmanirbhar Bharat stimulus package, the government launched some policies to help entrepreneurs to fight against the ongoing pandemic. One of the changes in supporting entrepreneurs was a new MSME definition. It helps avail many benefits that will aid MSMEs to grow significantly.

  • Earlier, the MSMEs classification was based on investments. Now, the classification is composite and includes the company's turnover as per the revised definitions. New MSME criteria have changed the classification of Investment Amount Limits for manufacturing and service units.

Revised MSME Limits

Classification based on the Composite MSME Criteria and Limits or MSME definition 2022 - Investment in Plant and Machinery/Equipment and Annual Turnover - are as follows:

MSME Classification

Enterprises in manufacturing and Services Segments


Investment: Less than INR 1 Crore

Turnover: Less than INR 5 Crores


Investment: Should not exceed INR 10 Crores

Turnover: Should not exceed INR 50 Crores


Investment: Should not exceed INR 50 Crores

Turnover: Should not exceed INR 250 Crores


These new classifications and limits have been revolutionary for the Indian business ecosystem. With these new changes per the MSME definition 2022, there would be no need for regular checks for the required investments in the plant and machinery. Also, there will be more transparency, non-discriminatory, and objectivity in the operations of MSMEs.

Role of MSMEs in the Indian Economy

The MSME Industry in India is contributing to socio-economic development impressively. Therefore, the Indian government is encouraging MSMEs promotion.

  • Within 25 months, over one crore MSMEs have registered on the Udyam portal, employing 7.6 crore people, including 1.7 crore women
  • MSMEs have gained significant importance with their 30% contribution to the country's Growth of Domestic Product (GDP), exports and employment generation. This sector also plays a crucial role in entrepreneurship development, especially in semi-urban and rural areas in the country
  • MSMEs are rapidly adopting digital payment systems showing prospects for further growth in the industry. According to IBEF data, as of July 14, 2022, the 4.73 million sellers and service providers registered at the Government e-Marketplace (GeM) portal have fulfilled over 10.55 million orders

Reputed FinTech companies like Pine Labs can help MSMEs accelerate commerce. They provide advanced FinTech solutions, like 360-degree Payments Solutions. MSMEs can access a quick and secure online payment gateway to upgrade their customer experience digitally.

The government keeps encouraging the sector with its various recent developments and policies. As of July 8, 2022, the government has disbursed Rs. 73,199.89 crores for 10.03 million loans under the Pradhan Mantri MUDRA Yojana (PMMY) scheme. The government aims to invest more in back-end services to improve the sector's performance.

What are the types of MSMEs?

MSMEs are classified into two categories, as per MSMED Act, 2006:

Manufacturing Enterprises

  • Companies engaged in the manufacturing or producing goods for industries listed under Schedule I, Industries (Development and Regulation Act, 1951, come under the purview of the MSME
  • Companies adding value to finished products by employing plants and machinery are included in this category

Service Enterprises

  • These are the enterprises engaged in rendering services. As per the definition of "enterprise" under the MSMED Act, the service provider should be an industrial undertaking/concern/establishment. An individual service provider would not be qualified as a service provider
  • For example, an individual Chartered Accountant (CA) practising without establishment is not considered a service enterprise. They should have an office to be considered as a service enterprise

These enterprises can be registered on the Udhyam portal under micro, small or medium categories. They should match the composite criteria of equipment investment and turnover for MSME classification.

What is the UAM number?

Udyog Aadhaar Memorandum (UAM) number is issued to certified micro/small/medium enterprises.

Now MSMEs need not refrain from tapping into the beneficial government schemes. Many enterprises in India are not registered due to the hassles of lengthy paperwork. As a solution, the government has come up with this simplified process. UAM registration saves you from the previous lengthy self-certification process of the MSMEs. The registration process is entirely paperless and can be completed online.

Post-completion, the applicant is allotted a unique Udyog Aadhaar Number (UAN). Udyog Aadhaar Number (UAN) is required to register for MSME scheme benefits. However, the UAM is not mandatory for all MSMEs.

Currently, entrepreneurs with UAM must migrate to Udyam Registration to benefit from various MSME schemes. The last date for this was June 30, 2022. If you have not migrated to Udyam Registration, you must re-register under Udyam Portal to get MSMEs benefits.

Benefits of Udyam registration for businesses

Udyam Registration entitles your business to the following benefits:

  • It is a permanent identification number without any requirement for renewal
  • You can complete the process even using your smartphone
  • It is a free of cost facility
  • Get easy loans with no collateral and benefit from government subsidies
  • There is a 1% exemption on the interest rate on Bank Overdraft
  • Get preference in procuring Government tender
  • Avail of various tax rebates and concessions in electricity bills
  • Special 50% discount on fees to file the trademark and patent filing
  • Avoid the delay in payment from buyers and get fast resolution of disputes

Support from Tech

Complex documentation processes, unavailability of collateral, and lack of credit history can play a big role in getting credit rejection through conventional lending mediums. FlexiCredit business loans offer you funds with no documentation and no-collateral facility. You have the flexibility to withdraw whenever required and pay interest on the portion of the loan you use.

For technological updates, automation, and credit solutions, MSMEs can get support from numerous reputed FinTech companies, like Pine Labs, serving big brands across industries.

Thus, FinTech companies are pioneers and have tailored effective financial and digital solutions to help MSMEs reach their full potential to support the economy.

Frequently Asked Questions

Q1. What is meant by an MSME?

MSME Meaning: MSME stands for Micro, small & medium enterprises. As per the MSMED Act of 2006, these companies are involved in the manufacturing and services sectors in the economy where the machinery & plant/equipment funding and annual turnover must be as per the defined limits.

Q2. What is the criterion for MSME classification?

  1. Micro: Investment should not be more than Rs.1 Crore, and turnover should not be more than Rs.5 crore.
  2. Small: Investment should not be more than Rs.10 Crores, and its annual turnover should not be more than Rs.50 crores.
  3. Medium: Investment should not be more than Rs. 50 Crores and its annual turnover should not be more than Rs. 250 Crores.

Q3. What has been changed in the MSME's new definition?

Earlier, the MSME criteria for manufacturing units and service enterprises were different. Now Manufacturing and Service enterprises are not differentiated for MSMEs classification.

Earlier, MSMEs were based on investments. Now the new MSMEs definition also includes the annual turnover of the company.

Q4. How many MSMEs are there in India?

According to the Ministry of MSME, there are more than nine crores of MSMEs in India, which account for 1/3rd of India's GDP. 1.5 crores of 9 crores MSMEs are registered under GST. There is room for an increase in MSME numbers in the coming years with easy Udyam Registration.