MSMEs: What They Are and Why They Matter

The 2020 criterion, notification S.O. 2119(E) of 26 June 2020

Composite, and uniform for manufacturing and services.

Three features to name.

• Composite means both conditions must be satisfied. An enterprise that exceeds either limit moves up to the next category. It is not a choice of tests.
• The manufacturing and service distinction disappeared, which was the second defect of the 2006 criterion.
• Udyam Registration was introduced with effect from 1 July 2020: the process is entirely online, paperless, requires no document upload and rests on self declaration, with investment and turnover data drawn from the income tax and goods and services tax systems.

The 2025 revision, notification S.O. 1364(E) of 21 March 2025, in force from 1 April 2025

The Finance Minister announced in the Budget speech for 2025-26 that, "to help MSMEs achieve higher efficiencies of scale, technological upgradation and better access to capital, the investment and turnover limits for classification of all MSMEs will be enhanced to 2.5 and 2 times respectively."

Applying those multipliers to the 2020 figures, which is arithmetic a reader can check:

The Economic Survey 2025-26 confirms the change and one of its effects: it refers to "the revised MSME classification thresholds implemented in April 2025, which expanded the eligibility for priority sector lending", and attributes part of the acceleration in MSME credit growth to it.

Why raise the limits at all? Because a threshold that does not move with prices and with the scale of modern equipment shrinks in real terms every year, and because a firm that loses its status by growing has a reason not to grow. Raising the limits lets an enterprise expand, modernise and still keep the benefits, which is the dwarfism problem discussed in [The Problems of MSMEs].

What the sector amounts to

From the Economic Survey 2025-26, with the source and date it gives for each figure.

Two cautions on these numbers. The enterprise and employment counts come from the Udyam Registration Portal, so they count registered enterprises and rise as registration spreads: part of the growth in the count is formalisation rather than new business. And the shares of manufacturing, exports and gross domestic product come from different sources and different years, so they should be quoted with those attributions rather than run together.

The other statutory pieces

Section 8: memorandum. An enterprise may, and in the case of a medium enterprise engaged in manufacture shall, file a memorandum with the prescribed authority. This is the statutory ancestor of Udyam Registration, and it is what makes the classification operative for a particular firm.

Section 2 contains the definitions, including of enterprise, and distinguishes an enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act 1951 from one providing or rendering services. That distinction survives in the Act although the classification no longer turns on it.

A worked example: which category, and what happens when it grows

Sunrise Fabricators invests 9 crore rupees in plant and machinery and has an annual turnover of 46 crore rupees.

Under the 2020 criterion. Investment of 9 crore is within the small limit of 10 crore; turnover of 46 crore is within the small limit of 50 crore. Both conditions are satisfied, so it is a small enterprise.

Suppose turnover rises to 58 crore, investment unchanged. The turnover now exceeds the small limit of 50 crore, and because the criterion is composite the enterprise moves up to medium, even though its investment is still well inside the small band. That is the trap in the word composite, and it is what a problem question tests.

Under the 2025 limits, on the same facts. The small band is now investment up to 25 crore and turnover up to 100 crore. Sunrise Fabricators at 9 crore and 58 crore is comfortably a small enterprise again, and it can grow to 100 crore of turnover before it loses that status.

What that changes for the firm. As a small enterprise it retains the delayed payment protection of sections 15 to 18, priority sector lending eligibility, the credit guarantee cover, and the reservation in public procurement. As a medium enterprise it loses some of these. The 2025 revision therefore does exactly what the Budget speech said it was for: it removes a reason not to grow.

What beginners get wrong

"The definition is in section 7 of the Act." Section 7 confers the power to classify by notification, and the limits printed in it are the 2006 ones. The operative limits are in the notifications of 2020 and 2025.

"Investment or turnover, whichever the enterprise prefers." The criterion is composite: both limits must be satisfied, and exceeding either moves the enterprise up.

"The limits differ for manufacturing and services." They did until 2020. They do not now.

"Udyam Registration requires documents." It is online, paperless, based on self declaration, with data drawn from the income tax and goods and services tax systems.

"7.47 crore MSMEs exist in India." That is the number registered on the Udyam portal as on 9 January 2026. Registration is still spreading, so the count measures formalisation as well as the sector.

Limits of the definition

A threshold definition always has an edge, and firms manage themselves around it. The 2025 increase moves the edge but does not remove it.

Turnover is a poor proxy for size in some trades. A jeweller or a fuel dealer turns over very large sums on small margins and small employment, and is classified by the same rule as a machine shop.

Employment is not part of the test at all, although employment is the sector's chief claim on policy. A capital intensive medium enterprise employing thirty people and a labour intensive one employing three hundred are in the same category.

Registration is voluntary for most enterprises, so the statistics describe the registered sector rather than the sector.

Quick revision

1. MSMED Act 2006 supplied a statutory definition, created the medium category, and gave a statutory remedy for delayed payment.
2. Section 7 as enacted, 2006: investment only, and different for manufacturing and services. Manufacturing: micro up to 25 lakh, small up to 5 crore, medium up to 10 crore. Services: micro up to 10 lakh, small up to 2 crore, medium up to 5 crore. Explanation 1 excludes pollution control, research and development and safety devices from the computation.
3. Notification S.O. 2119(E), 26 June 2020: composite criterion of investment and turnover, uniform for manufacturing and services. Micro 1 and 5 crore; small 10 and 50 crore; medium 50 and 250 crore. Udyam Registration from 1 July 2020, online, paperless, self declared.
4. Notification S.O. 1364(E), 21 March 2025, in force 1 April 2025: limits enhanced to 2.5 times for investment and 2 times for turnover, giving micro 2.5 and 10 crore, small 25 and 100 crore, medium 125 and 500 crore.
5. Composite means both: exceeding either limit moves the enterprise to the next category.
6. The sector: about 35.4 per cent of manufacturing, about 48.58 per cent of exports, 31.1 per cent of gross domestic product, over 7.47 crore enterprises employing over 32.82 crore persons on the Udyam portal as on 9 January 2026, and the second largest employer after agriculture.
7. Section 8 provides for filing a memorandum, mandatory for a medium enterprise in manufacturing, which is the ancestor of Udyam Registration.

Test yourself

1. How are micro, small and medium enterprises classified in India today? By a composite criterion of investment in plant and machinery or equipment together with annual turnover, applied uniformly to manufacturing and service enterprises, under notifications made under section 7 of the Micro, Small and Medium Enterprises Development Act 2006. The criterion was made composite and uniform by notification S.O. 2119(E) of 26 June 2020, with limits of one crore of investment and five crore of turnover for micro, ten and fifty crore for small, and fifty and two hundred and fifty crore for medium. Notification S.O. 1364(E) of 21 March 2025, in force from 1 April 2025, enhanced the investment limits to two and a half times and the turnover limits to twice those figures, giving two and a half and ten crore for micro, twenty five and one hundred crore for small, and one hundred and twenty five and five hundred crore for medium. Because the criterion is composite, an enterprise exceeding either limit is classified in the next higher category.

2. Why was the original criterion in section 7 abandoned? For two reasons. It measured investment alone, so an enterprise that bought better machinery could be pushed out of its category and lose its benefits merely by modernising, which gave small enterprises a positive reason to remain small and under equipped. And it prescribed different limits for manufacturing and for services, a distinction that became increasingly unworkable as services grew and as enterprises combined both activities. The composite criterion introduced in 2020 answers both objections by adding turnover, which reflects the size of the business rather than the quality of its equipment, and by applying the same limits to all enterprises.

3. What does composite mean in this context? Illustrate. It means that both conditions must be satisfied for an enterprise to fall in a category, so that exceeding either the investment limit or the turnover limit moves the enterprise into the next higher category. If an enterprise has investment of nine crore rupees and turnover of forty six crore, it satisfies both small enterprise limits under the 2020 criterion, of ten crore and fifty crore, and is small. If its turnover then rises to fifty eight crore with its investment unchanged, it exceeds the turnover limit alone and becomes medium, notwithstanding that its investment remains well within the small band. Under the 2025 limits, of twenty five crore and one hundred crore for small, the same enterprise would remain small.

4. Why were the classification limits raised in 2025? Because thresholds fixed in money terms shrink in real value as prices rise and as the cost of modern equipment increases, so that a limit which was generous in 2020 excluded firms of the same real size a few years later. More importantly, a classification that a firm loses by growing gives the firm a reason not to grow, which is the phenomenon of dwarfism in Indian industry. The Finance Minister's Budget speech for 2025-26 stated the purpose in terms: to help enterprises achieve higher efficiencies of scale, technological upgradation and better access to capital. The Economic Survey 2025-26 records one measurable effect, namely that the revised thresholds expanded eligibility for priority sector lending and contributed to the acceleration of MSME credit growth.

5. What is the economic importance of the MSME sector in India? On the figures in the Economic Survey 2025-26, the sector accounts for about 35.4 per cent of manufacturing and 31.1 per cent of gross domestic product, both on National Statistical Office data for 2023-24, and about 48.58 per cent of exports on Directorate General of Commercial Intelligence and Statistics data for 2024-25. Over 7.47 crore enterprises were registered on the Udyam portal as on 9 January 2026, employing over 32.82 crore persons, which makes the sector the second largest employer in India after agriculture. Its wider significance is that it creates employment at low capital cost per job, that it is dispersed rather than concentrated in a few cities, and that it is the principal route by which workers leaving agriculture find non farm work, which is the central structural problem identified elsewhere in this module.

6. What cautions apply to the MSME statistics? Three. The enterprise and employment counts are drawn from the Udyam Registration Portal, so they count registered enterprises; since registration is still spreading, part of the apparent growth reflects formalisation of existing businesses rather than the creation of new ones. The shares of manufacturing, exports and gross domestic product come from different agencies and different years, the first and third from the National Statistical Office for 2023-24 and the second from the Directorate General of Commercial Intelligence and Statistics for 2024-25, so they should be quoted with those attributions rather than presented as a single consistent set. And the classification itself takes no account of employment, so two enterprises with very different workforces can fall in the same category, which limits what the categories can tell us about the sector's employment contribution.