Policies for MSMEs

The Budget 2025-26 measures, from the Press Information Bureau's account of the Finance Minister's speech: credit guarantee cover for micro and small enterprises from 5 crore to 10 crore, expected to lead to additional credit of 1.5 lakh crore rupees over five years; for start ups from 10 crore to 20 crore, with the guarantee fee moderated to 1 per cent for loans in 27 focus sectors; and for well run exporter MSMEs, term loans up to 20 crore rupees.

Effect on credit. The Survey records that MSME credit was the primary driver of industrial credit growth in the first half of FY26, that MSME credit growth substantially outpaced that of large industry, and attributes the acceleration partly to the revised classification thresholds implemented in April 2025, which expanded eligibility for priority sector lending. Growth in gross bank credit to micro and small enterprises stood at 20.9 per cent year on year in August 2025 against 8.8 per cent in March 2025.

Front two: equity and subsidy

The Self Reliant India Fund. Launched to infuse 50,000 crore rupees of equity into MSMEs. As at 30 November 2025 it had assisted 682 enterprises with investment of 15,442 crore rupees.

Why equity and not loans. A loan must be serviced from the first month; equity does not. An enterprise expanding into a new product or a new market needs capital that can wait, and the absence of equity for unlisted small firms is a gap no amount of lending fills.

Prime Minister's Employment Generation Programme. Assists micro entrepreneurs by providing margin money subsidies on bank loans, and has been expanded to cover higher project costs and a wider scope of activities. It answers the problem that a first time entrepreneur cannot contribute the promoter's share a bank requires.

A new scheme announced in Budget 2025-26 for 5 lakh women, Scheduled Caste and Scheduled Tribe first time entrepreneurs, providing term loans up to 2 crore rupees over five years, drawing on the experience of the Stand Up India scheme.

Front three: procurement

Under the power in section 11, a public procurement policy reserves a share of the purchases of central ministries, departments and public sector undertakings for micro and small enterprises, with sub targets for enterprises owned by Scheduled Castes and Scheduled Tribes and by women.

Why it is a powerful instrument. It answers the marketing problem directly. The Government is the largest single buyer in the country, it pays reliably, and an order from it is a reference that helps the enterprise sell elsewhere.

Front four: technology, quality and clusters

The MSME Champions Scheme, with two components the Survey names: ZED Certification, promoting "Zero Defect, Zero Effect" practices, and the MSME Competitive (Lean) Scheme for productivity improvement.

MSME Innovative, which facilitates incubation, design interventions and the protection of intellectual property rights.

Cluster development, which supplies common facilities, a testing laboratory, a treatment plant, a design centre, to a group of enterprises that could not individually afford them. It is the standard answer to the technology and infrastructure problems, because it converts a fixed cost that defeats one small firm into a shared cost that a hundred can carry.

Front five: market access and receivables

TReDS, the Trade Receivables Discounting System. An electronic platform on which a supplier can sell an invoice due from a large buyer and receive the money at once, at a discount, the buyer paying the platform on the due date. It answers delayed payment by a commercial route rather than a legal one, which matters because [The Problems of MSMEs] shows that suppliers fear using the legal one.

The Survey records that the ecosystem has been expanded by reducing the turnover threshold for onboarding companies and central public sector enterprises from 500 crore rupees to 250 crore rupees, which widens the pool of buyers whose invoices can be discounted.

The Open Network for Digital Commerce and the Trade Enablement and Marketing Scheme, the latter aiming to help five lakh MSMEs onboard, so that small enterprises can reach national markets through formal e commerce and supply chains at lower transaction cost.

The Online Dispute Resolution scheme for delayed payments and the MSME ODR Portal. The Survey describes it as introducing a structured process that encourages amicable settlement between seller and buyer before the dispute moves into formal adjudication under the MSMED Act, so that an enterprise can recover a payment without damaging the relationship. The portal is end to end digital, faster and cheaper than traditional channels, combines negotiation, conciliation and arbitration, and is available at all hours in multiple languages.

This is the most instructive item in the chapter for a law student. Parliament created a strong statutory remedy in 2006, and twenty years later the policy response to its under use is to build a settlement mechanism that operates before the statutory remedy is invoked. A remedy that damages the relationship it exists to protect needs a step in front of it.

Front six: letting them grow

The revision of classification thresholds described in [MSMEs: What They Are and Why They Matter]: investment limits 2.5 times and turnover limits 2 times their previous levels with effect from 1 April 2025. It is a policy for MSMEs precisely because it removes a reason not to become one that is bigger.

Udyam Registration, online, paperless and based on self declaration, which lowers the cost of being formal and thereby the cost of qualifying for everything else on this list.

The policies matched to the problems

A worked example: one enterprise using the system

Shakti Precision, a micro enterprise making machined components, wants to buy a computer controlled lathe costing 90 lakh rupees and expand from one buyer to several.

1. Udyam Registration makes it visible: online, no documents, self declared, and its investment and turnover figures are drawn from the tax and goods and services tax systems.
2. A bank loan under priority sector lending, secured by a credit guarantee rather than by collateral it does not have. Since 1 April 2025 the cover extends to 10 crore rupees, so a 90 lakh loan is comfortably within it, and if the promoter is a woman the extent of cover is 90 per cent.
3. PMEGP margin money helps with the promoter's contribution the bank requires.
4. ZED certification under the MSME Champions Scheme gives it a quality credential a large buyer will ask for.
5. The procurement preference under section 11 gets it its first public sector order, which is both revenue and a reference.
6. TReDS lets it discount that buyer's invoice immediately instead of waiting the agreed period, so the new machine's instalments are met out of realised cash.
7. If a private buyer delays, the ODR portal offers negotiation and conciliation before the statutory route, so the commercial relationship survives; the statutory route under sections 15 to 19 remains if it does not.
8. When turnover crosses 50 crore rupees, the enterprise is still small, because the limit is now 100 crore. Under the 2020 limits it would have become medium and lost several of the benefits above.

What the example shows. No single measure would have sufficed, and each removes a specific obstacle identified in the previous chapter. That is the structure of a good answer on this topic.

Criticism

Credit reaches the registered, and most micro enterprises are not registered. Every instrument on this list requires the enterprise to be visible, which is why Udyam registration matters more than it looks and why the statistics measure formalisation as much as growth.

The guarantee helps the lender, not directly the borrower. It makes the bank willing to lend; it does not reduce the interest the borrower pays, and the guarantee fee is itself a cost.

Procurement preference depends on payment. A preference that produces an order and then a delayed payment can worsen an enterprise's working capital rather than improve it, which is why the disclosure and interest provisions apply to public undertakings as well.

Schemes are numerous and fragmented across ministries, and a micro enterprise without an accountant cannot navigate them. This is the same criticism made of poverty schemes in [Poverty Alleviation Strategies], and the answer is the same: convergence and a single digital identity.

Raising thresholds helps the larger firms in the category first. An enterprise that was near the old medium limit gains a great deal; a genuinely micro enterprise gains nothing from a higher medium threshold.

The binding constraint may be demand. None of these measures creates a customer. Where the problem is that nobody is buying, credit and certification do not help.

Quick revision

1. Statutory basis, Chapter IV of the MSMED Act 2006: section 9 promotion and development, section 10 credit facilities, section 11 procurement preference policy, sections 12 to 14 Funds, grants and their administration. Section 11 enables the preference policy; it does not itself create it.
2. Credit Guarantee Scheme: revamped 1 April 2023 after a 9,000 crore rupee corpus infusion into CGTMSE; ceiling 2 crore to 5 crore; fee as low as 0.37 per cent; cover for women owned enterprises 85 to 90 per cent. From 1 April 2025 the ceiling doubled to 10 crore and the fee was rationalised above 1 crore of cover.
3. Budget 2025-26: guarantee cover for micro and small enterprises 5 to 10 crore, expected to add 1.5 lakh crore rupees of credit over five years; start ups 10 to 20 crore with the fee moderated to 1 per cent in 27 focus sectors; well run exporter MSMEs, term loans up to 20 crore.
4. Effect: MSME credit was the primary driver of industrial credit growth in H1 FY26, with growth of 20.9 per cent year on year in August 2025 against 8.8 per cent in March 2025, attributed partly to the April 2025 thresholds expanding priority sector eligibility.
5. Equity: Self Reliant India Fund, 50,000 crore rupees, 682 enterprises and 15,442 crore rupees invested as at 30 November 2025. PMEGP margin money subsidy. A new scheme for 5 lakh women, Scheduled Caste and Scheduled Tribe first time entrepreneurs, term loans up to 2 crore over five years.
6. Technology and quality: MSME Champions with ZED Certification and the Lean scheme; MSME Innovative for incubation, design and intellectual property; cluster development for shared facilities.
7. Market access and receivables: TReDS, with the onboarding threshold for companies and central public sector enterprises reduced from 500 crore to 250 crore of turnover; ONDC; the Trade Enablement and Marketing Scheme targeting five lakh enterprises; and the ODR portal, which places negotiation, conciliation and arbitration before formal adjudication under the Act.
8. Growth: thresholds raised to 2.5 times investment and 2 times turnover from 1 April 2025; Udyam Registration lowers the cost of being formal.

Test yourself

1. What does the MSMED Act 2006 itself provide by way of promotional measures? Chapter IV of the Act, headed measures for promotion, development and enhancement of competitiveness, contains six sections. Section 9 empowers the Central Government to specify programmes and instructions for the promotion and development of the sector, covering skill development, technological upgradation, marketing assistance and infrastructure. Section 10 requires that policies and practices in respect of credit to these enterprises be progressive and as prescribed. Section 11 empowers the Central Government or a State Government to notify, by order, a preference policy in respect of goods and services produced and provided by micro and small enterprises. Sections 12, 13 and 14 provide respectively for the creation of Funds, for grants by the Central Government to them, and for their administration and utilisation. Section 11 is an enabling provision, so the public procurement policy is made under it rather than contained in it.

2. How does the Credit Guarantee Scheme work, and what has changed recently? It answers the central obstacle to lending to a small enterprise, namely the absence of collateral, by substituting a guarantee from the Credit Guarantee Fund Trust for Micro and Small Enterprises for the security the borrower cannot provide, so that the lender's risk is covered and the loan becomes bankable. The Economic Survey 2025-26 records that the scheme was revamped with effect from 1 April 2023 following a corpus infusion of 9,000 crore rupees, that the ceiling for guarantee coverage was raised from 2 crore to 5 crore rupees, that the annual guarantee fee was reduced to as low as 0.37 per cent, and that coverage for women owned enterprises was increased from 85 per cent to 90 per cent. With effect from 1 April 2025 the ceiling was doubled again from 5 crore to 10 crore rupees and the annual guarantee fee was rationalised for coverage exceeding 1 crore rupees.

3. Why is equity support necessary in addition to credit, and what does India provide? Because a loan must be serviced from the first month whether or not the investment has begun to earn, whereas equity can wait for the return, so an enterprise entering a new product or market needs capital of a kind that lending cannot supply. Unlisted small enterprises have almost no access to equity, since they are too small for the capital market and too risky for most investors. India's principal instrument is the Self Reliant India Fund, launched to infuse 50,000 crore rupees of equity into the sector, which as at 30 November 2025 had assisted 682 enterprises with investment of 15,442 crore rupees. The Prime Minister's Employment Generation Programme performs a related function at the micro level by providing a margin money subsidy that supplies the promoter's contribution a bank requires.

4. Explain TReDS and why it matters. The Trade Receivables Discounting System is an electronic platform on which a supplier that has raised an invoice on a large buyer can sell that receivable at a discount and obtain the money immediately, the buyer paying the platform on the due date. It matters because delayed payment is the sector's most damaging problem, with an estimated 8.1 lakh crore rupees locked up, and because the statutory remedy under sections 15 to 19 of the MSMED Act is under used, suppliers fearing that filing a claim will cost them the buyer's future business. Discounting converts the receivable into cash without any dispute and without any confrontation. The Economic Survey records that the ecosystem has been widened by reducing the turnover threshold for onboarding companies and central public sector enterprises from 500 crore rupees to 250 crore rupees, which increases the number of buyers whose invoices can be discounted.

5. Why was an online dispute resolution scheme introduced when a statutory remedy already exists? Because the statutory remedy, though strong on paper, is not used. Sections 15 to 19 of the MSMED Act cap the payment period at forty five days, impose compound interest at three times the bank rate notwithstanding any contract, provide a Facilitation Council that must decide within ninety days, and require a seventy five per cent deposit before any appeal. But as the Economic Survey explains, an enterprise that files such a claim risks being seen as adversarial by a buyer on whom it depends for repeat orders, and the fear of losing the relationship deters it from claiming even large sums. The online dispute resolution scheme and portal therefore place negotiation, conciliation and arbitration before the formal adjudication under the Act, so that the money can be recovered without breaking the commercial tie; the portal is end to end digital, low cost, available at all hours and in multiple languages. The statutory remedy remains available if settlement fails.

6. Criticise India's policy approach to the MSME sector. Every instrument requires the enterprise to be registered and therefore visible, so the measures reach the formal part of a sector that is largely informal, and part of the apparent growth in the sector's size is formalisation rather than expansion. The credit guarantee makes the bank willing to lend but does not by itself reduce the interest the borrower pays, and the guarantee fee is a further cost. A procurement preference that produces an order followed by a delayed payment can worsen an enterprise's working capital rather than improve it. The schemes are numerous and spread across ministries, and a micro enterprise without professional help cannot navigate them, which is the same fragmentation criticised in the poverty programmes. Raising the classification thresholds helps enterprises near the upper limits most and does nothing for a genuinely micro unit. And none of these measures creates demand, so where the binding constraint is the absence of customers, credit, certification and platforms cannot substitute for it.