MSMEs and startups

The first principle

Most Indian workers outside farming work in tiny firms, and those firms stay tiny because they lack three things a large firm takes for granted: cheap credit, buyers who pay on time and rules they can afford to follow. Policy for micro, small and medium enterprises (MSMEs) is therefore really policy for helping firms grow, while policy for startups is about financing risk, because a new idea fails more often than it succeeds and banks are built not to lose money.

The core

What an MSME is

• The law. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 defines the categories and protects small suppliers against late payment. Until 2020 it classified firms by investment alone, with separate and lower limits for services.
• The composite criterion of 2020. From 1 July 2020 a firm is classified by both investment in plant and machinery or equipment and annual turnover, with the same limits for manufacturing and services. If it crosses either limit it moves to the next category, and turnover from exports is left out, so that exporting does not cost a firm its status.
• The limits from 1 April 2025. The Union Budget 2025-26 raised the limits by about two and a half times for investment and two times for turnover: a micro firm may now have investment up to Rs 2.5 crore and turnover up to Rs 10 crore, a small firm up to Rs 25 crore and Rs 100 crore, and a medium firm up to Rs 125 crore and Rs 500 crore. The aim is to let firms grow without losing the benefits of their category.
• Udyam registration. Since July 2020 an MSME registers on the Udyam portal, free, online and on self declaration using its Permanent Account Number (PAN) and Aadhaar, with investment and turnover drawn from income tax and Goods and Services Tax (GST) records. The Udyam Assist Platform, launched in January 2023, registers informal micro units that have no GST number, so that they can get priority sector loans.

What a startup is

• Recognition. The Department for Promotion of Industry and Internal Trade (DPIIT) recognises a startup under a notification revised in February 2026: an entity up to 10 years old with turnover up to Rs 200 crore in every year, working on innovation or a scalable business model. A new category of deep tech startup may be up to 20 years old with turnover up to Rs 300 crore, because science based products take longer to reach the market, and cooperative societies are now eligible as well.
• Why the difference matters. An MSME is defined by size and may run a traditional business for decades, while a startup is defined by age and innovation and usually seeks equity rather than loans.

Dimensions

• Employment. MSMEs are the largest employers after agriculture, and almost all of them are micro: the 2015-16 National Sample Survey counted about 6.3 crore MSMEs employing about 11 crore people, with micro units forming over 99 per cent of the total.
• Output and trade. MSMEs produce about 30 per cent of gross domestic product (GDP) and about 35 per cent of manufacturing output (2022-23), and over 45 per cent of exports (2023-24), by estimates cited by the Ministry of MSME in 2025.
• Regional and social. Clusters such as Tiruppur in knitwear, Moradabad in brassware and Ludhiana in hosiery and cycle parts spread industry beyond metros, and MSMEs are the main route to enterprise for women, Scheduled Castes and Scheduled Tribes and artisans.
• Financial. Small firms lack collateral and audited accounts, so banks either lend at high rates or not at all, and many depend on moneylenders and supplier credit.
• Innovation. Startups bring new products in finance, retail, health and now deep technology, and they draw global venture capital into India.

In practice

Credit and payments

• The credit gap. The International Finance Corporation estimated in 2018, on data for 2017, that the formal credit gap of Indian MSMEs was about Rs 25 lakh crore, because most of their viable demand for loans was met by informal sources or not met at all.
• Guarantees. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), set up in 2000, guarantees collateral free loans so that a bank bears only part of the loss; the ceiling on a guaranteed loan has been raised from Rs 5 crore to Rs 10 crore. In 2020 the Emergency Credit Line Guarantee Scheme guaranteed extra loans to firms hit by the pandemic.
• Small loans. The Pradhan Mantri Mudra Yojana (2015) gives loans in the Shishu, Kishore, Tarun and Tarun Plus categories, the last up to Rs 20 lakh, and banks must lend 7.5 per cent of their adjusted net bank credit to micro enterprises under priority sector norms.
• Getting paid. The MSMED Act requires a buyer to pay a micro or small supplier within the agreed period, at most 45 days, or pay interest at three times the bank rate of the Reserve Bank of India (RBI), compounded monthly. The Finance Act, 2023 added section 43B(h) to the Income-tax Act, 1961, under which a buyer could deduct such a payment as an expense only in the year it was actually paid if paid late, and the Trade Receivables Discounting System (TReDS) lets a supplier sell its invoices on large buyers to financiers at once.

Schemes for growth

• Prime Minister's Employment Generation Programme (PMEGP, 2008-09) subsidises the margin money of new micro units, and had helped about 10 lakh units by 2025 (Press Information Bureau, PIB).
• Raising and Accelerating MSME Performance (RAMP, 2022), supported by the World Bank, strengthens State support systems, and PM Vishwakarma (2023) gives training, tools and collateral free loans to traditional artisans.

Startups

• Startup India (16 January 2016) began with self certification under labour and environmental laws, faster patent examination and fast exit under the Insolvency and Bankruptcy Code. DPIIT had recognised over 1.5 lakh startups by 2025.
• Fund of Funds for Startups (FFS, 2016). Rather than invest directly, the government gave Rs 10,000 crore to the Small Industries Development Bank of India (SIDBI) to invest in venture funds registered with the Securities and Exchange Board of India (SEBI) as alternative investment funds (AIFs). The full corpus has been committed to more than 140 AIFs, which have invested over Rs 20,000 crore in more than 1,000 startups, so each rupee of public money drew in private money as well.
• A second Fund of Funds, announced in the Union Budget 2025-26 with another Rs 10,000 crore, has a wider scope than the first.
• Other support. The Startup India Seed Fund Scheme (2021, Rs 945 crore) funds proofs of concept, the Credit Guarantee Scheme for Startups (2022) backs loans, section 80-IAC gives eligible startups a tax holiday for three consecutive years out of their first ten, and the so called angel tax on share premiums was abolished in 2024.

Issues and way forward

• The missing middle. India has millions of micro firms and a few large ones but few medium firms, because benefits end and compliance jumps as a firm grows, so firms prefer to stay small or split. Higher limits from 2025, benefits that taper rather than stop and simpler compliance help firms graduate.
• Informality. Many micro units are outside GST and income tax records, so they cannot show the cash flows lenders need. Udyam Assist, GST data, the Account Aggregator framework and cash flow based lending can build a credit history without collateral.
• Delayed payments. Large buyers, including government bodies, often pay late, and small suppliers fear losing the buyer if they complain. Mandatory TReDS for large buyers, faster disposal by the Micro and Small Enterprises Facilitation Councils and the MSME Samadhaan portal address this.
• Technology and quality. Old machines and low quality keep MSMEs out of export chains; cluster common facility centres, quality certification and links with large firms under the production linked incentive schemes help, as the industrial policy note discusses.
• Startups concentrated and fragile. Funding is concentrated in Bengaluru, Delhi and Mumbai and in consumer internet, and it falls sharply when global interest rates rise. Domestic pools of capital such as the second Fund of Funds and pension money, support beyond metros and patient capital for deep tech are the remedies the government has chosen.

Common confusions

• MSME and startup. An MSME is defined by investment and turnover and may be decades old, while a startup is defined by age, turnover and innovation; a firm can be both.
• Udyam and Udyam Assist. Udyam registers firms with PAN and, where relevant, GST data, while Udyam Assist registers informal micro units without GST through banks and other designated agencies, mainly to bring them into priority sector lending.
• Fund of Funds and a venture fund. A venture fund invests in startups, while the Fund of Funds invests in venture funds and never chooses a startup itself.
• Credit guarantee and subsidy. A guarantee pays the bank only if a loan fails, so it costs the budget little when loans are repaid, while a subsidy is paid on every loan.
• Investment limit and turnover limit. Both must be within a category's limit, so a firm with small investment but large domestic turnover is not micro.

For the exam

• Keyword bank: composite criterion, Udyam registration, Udyam Assist Platform, missing middle, graduation, credit gap, collateral free lending, CGTMSE, priority sector lending, delayed payments, TReDS, DPIIT recognition, deep tech startup, Fund of Funds, alternative investment funds.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: More than 6 crore enterprises had registered on Udyam and Udyam Assist by 2025, and MSMEs account for over 45 per cent of India's exports (Ministry of MSME, 2025).
  • Introduction with a source: The MSMED Act, 2006 promised small suppliers payment within 45 days, yet late payment remains their most common complaint, which is why the Finance Act, 2023 tied a buyer's tax deduction to prompt payment.
  • Conclusion: The aim of MSME policy is not more small firms but small firms that become medium and large, which needs credit on cash flow, prompt payment and compliance that rises gently with size.
  • Conclusion: Startups need patient domestic capital and a reach beyond three cities if they are to turn India's research and talent into products made at home.