The reason? Despite the Centre’s efforts in improving ease of business, the MSMEs, especially those dealing in exports, have to navigate through a complicated regulatory web.

The MSME sector - with almost 99% being micro units - needs single window clearance, but they are required to engage with multiple authorities and regulators for approval. This adds to their operational costs. Small wonder, most MSMEs have shown a reluctance to scale up their businesses.

“The regulatory hurdle is daunting for the micro and small units as they are required to get clearances and approvals from multiple authorities and regulators adding to their cost of operation,” Rahul Ahluwalia, Economist and Director, Foundation for Economic Development (FED), told The Secretariat.

“Small firms have encountered difficulties in tapping into export markets due to the inherent obstacles posed by economies of scale. It proves more challenging for small enterprises to enter foreign markets, adhere to compliance requirements, achieve cost-effective production, and efficiently manage logistics for clients,” a joint report prepared by the Niti Aayog and FED in 2024 said. “For a first-time exporter, the compliance burden alone is enough to make the whole exercise not worth it,” it noted.

Ahluwalia said that the situation has not changed much in two years.

The share of MSME exports in the country which rose to 49.75% in 2019-20 just before the Covid pandemic has now fallen to less than 46%.

MSMEs Refuse To Scale Up

About 8 crore MSMEs are registered today on the Udyam portal, reflecting an increase of more than 1.5 crore from about 6.5 crore in 2024. But a separate Niti Aayog study released this year highlighted that “a large share has been micro for years, sometimes decades”, reflecting either their inability to scale up or their reluctance despite the definition of “MSME” being altered in 2020, a move that was aimed at encouraging these smaller units to grow.

Liquidity Problem

Research by FED revealed that as of early 2025, over 46,000 companies reported dues of about ₹22,730 crore beyond the 45-day legal repayment deadline applicable for MSMEs. What is even more shocking is that state governments and public sector undertakings account for nearly 40% of defaulters.

Access to credit has always been an issue for MSMEs, which often fail to provide the required guarantees, collaterals, and audit records.

Atanu Chakraborty, former HDFC Bank Chairman, however, told The Secretariat that credit demand from MSMEs has been weakening. “It is incorrect to say that banks are shying away from giving credit to the MSMEs, the fact is that there is lesser demand,” he said, adding that documentation for credit worthiness is a cause for concern.

A McKinsey Global Institute report in 2024 said that India’s “missing middle of mid-size companies” needs to be addressed. It pointed out that MSMEs have been facing structural barriers, such as the high cost of compliance and finance, that have tended to constrain their growth.

Even as India observed MSME Day on June 27, it must smell the coffee. The MSME sector needs to be given the required push for accelerating economic growth.