What Is an MSME and What Are the Eligibility Criteria

The interplay of digital technology and policy reforms have paved an exciting way ahead for Indian MSMEs. 

Nikhil Arora, GoDaddy India

The atmosphere around MSMEs is encouraging despite the whipping the sector has received from the COVID-19 pandemic. 

Since 2020, MSMEs have been in the news as the Government of India is trying to revive the sector by introducing schemes like the Udyog Aadhar memorandum scheme, women entrepreneurship, and zero defect zero effect (ZED).

But what are MSMEs and why are they so important to India? 

Let’s dive in. 

What is an MSME?

MSME is short for Micro, Small, and Medium Enterprises. 

The Government of India introduced the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 to regulate MSMEs engaged in the manufacturing, processing, or preservation of commodities and goods. 

(Commodities are raw materials used to make goods. Good is a term used to define finished products. For instance, atta is a commodity and bread is goods.)

Source: IBEF

  • The number of registered MSME units increased to 2.5 million in 2020 after the Udyog Aadhaar Memorandum policy was launched.
  • The number of MSMEs increased by a CAGR (compound annual growth rate) of 18.5% between 2019 and 2020.  

(CAGR is defined as the mean annual growth rate of an investment over a particular period longer than one year.)

MSMEs are considered the backbone or the growth engine of the Indian economy because they provide a boost to the socio-economic development of the country. 

The sector contributes immensely to India’s Gross Domestic Product (GDP) and exports:

  • The share of MSME Gross Value Added (GVA) in the GDP was 30% for 2019-20. 
  • The share of MSME product exports to India’s exports was 49.5% in 2020-21. 

MSMEs boost entrepreneurship development in semi-urban and rural areas of India. 

  • As per data from the Prime Minister’s Employment Generation Programme (PMEGP), micro-enterprises employed 5.95 lakh people in 2020-21.

Now that we have an idea of the importance of the MSME sector, let’s understand how the government defines MSMEs.

Eligibility criteria for MSMEs

According to the provisions of the MSMED Act, 2006, MSMEs are categorized into two heads: 

  • Manufacturing enterprises
  • Service enterprises

These enterprises are further sub-categorized based on investment in plant and equipment and annual turnover.

Source: MSMEX

The latest criteria (effective July 2020) for the classification of micro, small, and medium enterprises are:

  • Micro Enterprise: 
  • Investment does not exceed INR 1 crore 
  • Turnover does not exceed INR 5 crores
  • Small Enterprise:
  • Investment does not exceed INR 10 crores
  • Turnover does not exceed INR 50 crores
  • Medium Enterprise:
  • Investment does not exceed INR 50 crores
  • Turnover does not exceed INR 250 crores

If you intend to establish a micro, small, or medium business, you’re encouraged to register on the government’s portal. 

Registration is not mandatory but you stand to gain a variety of benefits, some of which we will explore in detail ahead. 

MSME registration process

Previously, business owners had to file for a Udyog Aadhar Memorandum (UAM). Since October 21, 2021, MSMEs can register online at the Udyam Registration portal. The system is integrated with income tax and GSTIN systems.

  • Registration is free, paperless, and based on self-declaration. 
  • After registration, a permanent registration number is provided and a certificate is generated online.
  • Registration does not have to be renewed periodically.
  • While the registration process does not require you to upload any proof, you should have the following: PAN, GSTIN, and Aadhar. 

Benefits of MSME Registration

The government has incentivized registration with a bevy of benefits:

  • Collateral-free credit available under The Credit Guarantee Trust Fund Scheme 
  • 50% subsidy on patent registration fees
  • 1% overdraft interest rate exemption
  • Eligible for subsidies for industrial promotion
  • Protection against delayed payments: Buyers are required to make payments on or before the agreed date or within 15 days of receiving goods/services.
  • Concessions on electricity bills
  • Reimbursement of ISO certification expenses

How is the government encouraging MSMEs? 

The government is pushing hard to spur the growth of MSMEs, especially since the sector has borne the brunt of the economic turndown due to COVID-19. 

Take a look at these initiatives:

  • In July 2021, retail and wholesale trades were added to the MSME sector to increase economic growth. 
  • The government has also doubled the budget allocation for MSMEs in FY22 to INR 15,700 crores
  • MSMEs are encouraged to market their products on the Government e-Marketplace (GEM), from where PSUs and Ministries source their procurement. 
  • MSMEs are also encouraged to adopt digital payments instead of cash. 

Summing up

The government wants to double India’s economy to US$5 trillion in the next five years. To achieve this goal, it is looking to the MSME sector to generate more employment opportunities.

Hence, a variety of schemes related to skill development training, credit and financial assistance, marketing assistance, and quality and technological upgrades have been introduced. 

Let’s look forward to a stronger, more self-reliant India!

Written as part of Blogchatter’s campaign #ECommerceInnovation.

This blog post is part of the blog challenge ‘Blogaberry Dazzle’ hosted by Cindy D’Silva and Noor Anand Chawla in collaboration with Mojo Box – A great way to sample brands before buying them.


23 responses to “What Is an MSME and What Are the Eligibility Criteria”

  1. A well summarised post on a timely subject!

  2. A detailed and informative post. People really need to know all about this.

  3. Thank you for reading!

  4. Thank you for reading!

  5. Thank you for reading!

  6. Amazing read. MSMEs are the backbone of Indian economy. I think government is doing/will continue doing a lot of stuff to support in this space. This post gave me a perspective of what it takes to become one. Nwver thought in that direction.

  7. That’s one detailed article about MSME. Very helpful for people who want to start or want to know about how small businesses can grow in India.

  8. Another excellent and detailed post, Satabdi. Small businesses need all the support they can get. I hope this campaign prompts more people to consider MSMEs as an option.

  9. Thank you for reading!

  10. Thank you for reading, Suhasini!

  11. Thank you for reading!

  12. Thank you for reading!

  13. Thank you for reading!

  14. A very informative post. Your posts are always well researched. It will be very useful for people who want to start their own business. Women-owned companies get additional benefits also.

  15. Well researched and elaborate explanation of MSME, Satabdi.I am sure whoever reads will benefit.

  16. With so many people coming up with ideas and startup initiatives, MSME is a segment that is fast gaining popularity and one to look out for all aspiring business folks. Very details post.

  17. Very apt post about the importance of MSME’s and their impact on society. This article is a one stop shop for all the people trying to setup the MSMEs as it has all the required information

  18. Firstly, MSMEs have contributed immensely to the country’s socio-economic development. Your post is very apt, I must say.

  19. That’s a complete article on MSMEs. People are going to find it very useful because you’ve touched all the relevant points. From what’s MSME to how to avail government help, everything is up to date.

  20. Thank you for reading, Ghazala!

  21. Thank you for reading, Smita!

  22. Thanks Satabdi for such an informative and useful writeup. I didn’t know about MSME and all thanks to you to give me an idea of it. Glad to know that our Indian Govt. is supporting people and trying to double India’s economy to US$5 trillion in the next five years.

  23. Small business helps many , especially in rural areas and small towns. Government should support and encourage such small business.

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