Good Inputs But Statist Bias Is Still There

The report, ‘Enhancing MSMEs Competitiveness in India,’ underlines the government’s emphasis on boosting micro, small and medium enterprises. However, it also shows that the focus has not shifted completely from statist underpinnings to the free market imperative.

The Institute For Competitiveness (IFC) prepared the report for the Prime Minister-headed Niti Aayog. The IFC, chaired by Prof Amit Kapoor of Stanford University, did not receive financial assistance from the Niti Aayog. Also, Niti Aayog makes it clear that it “does not endorse or assume responsibility for the report’s findings and conclusions.”

At any rate, the report’s findings and conclusions are not at variance with the premises and principles of the Narendra Modi government. It has recommended systemic reforms in financing, skilling, innovation, and market access to MSMEs, including reform of the Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE). The CGTMSE, which provides credit guarantees to financial institutions lending to MSMEs, is seen as a critical lever in improving access to finance.

The report suggests that the CGTMSE framework must undergo significant revamping. Enhancing regulatory oversight, improving transparency, and further reducing risk premiums for borrowers are cited as key measures to make the scheme more effective and inclusive. By doing so, the initiative can better support small businesses that lack collateral and are underserved by the mainstream financial system.

The role of the Small Industries Development Bank of India (Sidbi) is emphasized in the context of strengthening the capacity of non-banking financial companies (NBFCs). The report calls for Sidbi to play a catalytic role in supporting NBFCs through capacity building, improved governance frameworks, and strategic guidance. Such steps are essential to enable NBFCs to scale up their operations, reach underserved markets, and extend credit to micro and small enterprises that often fall outside the formal credit net.

Another pivotal recommendation involves lowering the eligibility thresholds for MSME subsidy schemes at the state level. Many government programmes that offer capital and interest subsidies remain inaccessible to smaller or informal enterprises due to stringent entry criteria. By relaxing these conditions and ensuring a lifecycle approach to financing—covering MSMEs from inception through growth and maturity—the ecosystem can become more inclusive and better tailored to the real-world needs of entrepreneurs.

The IFC-Niti report also delves into the broader macroeconomic contribution of the sector. MSMEs accounted for 30.1 per cent of India’s gross value added (GVA) in 2020-21, underlining their critical role in economic activity. Furthermore, the sector made substantial contributions to foreign trade, with exports reaching Rs 12.39 lakh crore in 2024-25, and the number of export-oriented units rising to 173,350. These figures underscore the importance of MSMEs not just as employment generators, but also as engines of innovation, value addition, and global competitiveness.

However, the report identifies a persistent structural challenge commonly referred to as the “missing middle” problem. Many micro-enterprises remain trapped in their size category, unable to scale up due to regulatory, financial, and operational bottlenecks. On the other hand, a few medium-sized firms manage to grow large, often with state support or easier access to resources. To address this imbalance, the report advocates for a comprehensive and coherent policy framework that allows enterprises to scale organically, build resilience, and fully realize economies of scale in production and distribution.

The need to foster formalization and improve tax compliance also finds significant mention. The report calls for streamlining income tax procedures, reducing bureaucratic red tape, and ensuring more equitable treatment for MSMEs under the taxation system. By simplifying processes and reducing the cost of compliance, a greater number of informal enterprises may be encouraged to enter the formal economy, thereby accessing benefits, credit, and growth opportunities more readily.

A crucial aspect of MSME development is the availability of skilled manpower, and here the report makes a strong case for investing in STEM (Science, Technology, Engineering, and Mathematics) education. It highlights that India’s rapidly evolving job market requires training programs that are responsive to industry needs. These must offer last-mile connectivity, particularly for micro-enterprises based in remote or rural areas. Moreover, the report stresses the importance of reforming vocational education and technical training, which currently suffers from outdated curricula and insufficient industry linkages.

To enhance the effectiveness of skill-building initiatives, the report recommends that more states provide partial subsidies for employment training. Such subsidies can help reduce the burden on small enterprises, which often lack the financial bandwidth to invest in workforce development. Ensuring accessibility and outreach of these programs is especially important for MSMEs in smaller towns and rural pockets.

In the area of supply chain development, the report highlights that MSMEs need to strengthen linkages through affordable digital risk management solutions. These tools can help enterprises track their supply chains, manage inventory, and oversee real-time logistics. In doing so, MSMEs can build more resilient and responsive supply networks, which is crucial for both domestic competitiveness and integration into global value chains.

The IFC-Niti report also suggests developing tailored insurance products that combine traditional risk mitigation with modern digital tools. Such products would enhance the resilience of MSMEs against external shocks like climate events, geopolitical disruptions, or pandemics. These insurance offerings could be tied to digital platforms that allow MSMEs to monitor risks in real-time and act accordingly.

Technology adoption, particularly artificial intelligence (AI), is identified as a game-changer for the sector. However, uptake remains low due to a lack of awareness, high costs, and limited technical know-how. To address this gap, the report recommends awareness campaigns, accessible training platforms, and the creation of collaborative environments where MSMEs can exchange knowledge and experiences. Additionally, subsidies, grants, and low-interest loans can help small businesses invest in AI technologies and upgrade their processes.

A major thrust is also placed on infrastructure development. The report calls for state governments to develop MSME-specific infrastructure, such as co-working spaces, shared facilities, and industrial parks. These shared resources can reduce the cost burden on small businesses, provide them with access to modern tools and technologies, and enhance their overall competitiveness. It can also serve as a platform for collaboration, innovation, and cluster-based growth.

The IFC-Niti report is a comprehensive and well-structured document that provides policymakers with actionable insights to transform India’s MSME ecosystem. By implementing its recommendations—while integrating more market-led initiatives and deregulation—India can empower its MSMEs to not only survive but thrive in an increasingly competitive global economy.

While the IFC-NITI Aayog report offers valuable insights and actionable recommendations for strengthening India’s MSME sector, its impact could have been significantly enhanced with a stronger emphasis on market-driven solutions and deregulatory processes. The report effectively identifies key challenges and proposes reforms across areas like financing, skilling, and infrastructure. However, greater integration of market mechanisms—such as encouraging competition, fostering private sector participation in training and innovation, and leveraging fintech platforms for credit delivery—would have added depth and sustainability to its recommendations.

Moreover, a focused push towards simplifying regulatory frameworks at both Central and state levels could help MSMEs navigate bureaucratic hurdles more efficiently, thereby unlocking their full growth potential. Deregulation not only reduces compliance burdens but also encourages entrepreneurship and formalization. By balancing government intervention with a more liberalized and business-friendly approach, the report could have served as a more comprehensive blueprint for enabling MSMEs to scale, innovate, and compete globally.