Episode 5: If MSMEs are the backbone of India’s economy, what’s holding them back?
India’s MSMEs are central to the country’s economic growth, supporting employment, entrepreneurship and local economies. Yet many small businesses continue to face challenges around access to finance, awareness, compliance and technology.
In this episode of The Thought Line, Dr. Sanjay Bhardwaj, Partner, Public and Social Sector Advisory at Forvis Mazars in India, shares his insights on the realities facing MSMEs on the ground and the gaps that remain despite various government initiatives.
The episode also looks at the role of Corporate Mitr and how initiatives focused on awareness, access and implementation can help bridge the gap between policy and the needs of MSMEs on the ground.
Listen to the episode to explore what it will take to strengthen India's MSME ecosystem and enable small businesses to grow with greater confidence.
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Episode transcript
Hosts: Kanishka Gulati, Simran Sadana
Guest: Dr. Sanjay Bhardwaj, Partner, Public and Social Sector Advisory
Kanishka Gulati:
Think about the small businesses around you—manufacturers, traders, service providers. These are the backbone of our economy, and yet, many of them are still operating outside the formal system. Limited access to finance, low awareness, and fear of compliance—all of these keep holding them back, which leads to a bigger question: Is the challenge truly a lack of support, or is it the gap between policy and ground reality?
Welcome to the Thought Line. I am Kanishka Gulati.
Simran Sadana:
And I'm Simran Sidana, your hosts for today's episode. In this episode, we are focusing on a sector that plays a crucial role in India's growth story—the MSME ecosystem. From job creation to contributing significantly to the GDP, MSMEs are at the core of the economy. Still, they face numerous challenges related to operations and management.
Kanishka Gulati:
To help us understand this better, we are joined by an expert who works closely with micro, small, and medium enterprise (MSME)-focused programs and policy implementation.
Simran Sadana:
Today, we have with us Dr. Sanjay Bhardwaj, Partner – Public and Social Sector Advisory, Forvis Mazars in India.
Dr. Sanjay Bhardwaj is a seasoned development sector professional with over 20 years of experience across public health, education, government consulting, and advisory services.
Dr. Sanjay:
Thank you, Simran. Thank you, Kanishka.
Kanishka Gulati:
In this conversation, we will explore the real challenges MSMEs face on the ground, why gaps persist despite numerous initiatives, and what needs to be done to build a more inclusive and effective ecosystem. We have recorded this episode in Hindi, and its English transcript is available on our website.
Sanjay, let's start this podcast with the most fundamental question
'Whenever we talk about the MSME sector, discussions often revolve around big numbers like employment, GDP contribution, and exports. But if we look at the ground level, where are units facing the biggest challenge today?'
Dr. Sanjay:
Look, Kanishka, before understanding what challenges MSMEs are facing, let's first understand the MSME ecosystem.
So, there are about 8.5 crore registered MSMEs. Those that are micro and small, their number is high—99% are micro and small. And the medium category is a very small, very minute number. For example, out of 8.5 crore, the micro ones are around 8.5 crore itself, while medium and small combined are only about 5 lakh and 41,000. So, the number of micro enterprises is huge. Micro means very small, extremely small.
So, if we look at this entire ecosystem, 99% are micro enterprises. If you exclude small and medium, even if you combine both small and medium, they account for only about 1.25%. So, overall... although we call it MSME, in reality, these are micro enterprises.
So, if we look at all the policies we design, we keep MSMEs in mind, whereas in reality, we should keep micro enterprises in mind because 99% are micro.
Now, coming to your question about what fundamental difficulties they face—in our view, there are five to six major challenges that MSMEs encounter:
- Access to Finance: They lack accessibility to finance; they simply don't get funding. Furthermore, among those who are eligible—meaning those who manage to get it—it is only 14%. That means nearly 86% are unable to get finance due to one reason or another. So, the first is access to finance.
- Delayed Payments: Even if they supply something to an enterprise, the delay in receiving their money is the second issue. Although to address this delay, the government has enacted a rule requiring MSMEs to be paid within 45 days post-supply, it isn't effectively implemented on the ground. Loop holes have emerged, and people exploit them, resulting in non-payment.
- Compliance Burden: For example, take Chandigarh. There might be around 30,000 MSMEs in Chandigarh, but formally, there may only be 10,000 to 12,000 right now. Recently, we got a project where we need to formalize MSMEs—formalization meaning registering them on the Udyam portal. Many MSMEs are working but aren't formal. Because they aren't formal, they feel, "Why take on the burden of compliance? If we become formal, compliance pressure will fall on us." So, compliance burden is the third issue.
- Technology Adoption: Technology adoption is quite simple to look at. If you see, 95% of MSMEs use UPI. However, for their own transformation, they don't use IT. So, they adopted IT for receiving payments, but when it comes to transforming their own enterprise, hardly 20% to 25% of MSMEs do it. So, that's another challenge.
- Skill and Human Resources: For example, what kind of person or resource does an MSME need? They need someone who can multi-task—someone who can manage accounts, bookkeeping, and sales. That versatile resource is hard to find. They find specialized professionals whom they cannot afford. So, this is a human resource-related challenge.
- Infrastructure: For example, connectivity-wise, if someone is producing something in Ludhiana, their connectivity to other metro cities might not be proper.
So, these are the five to six types of challenges we observe in MSMEs.
Simran Sadana:
Thank you, Sanjay, for explaining MSMEs to our audience. Recently, the Honorable Finance Minister, Mrs. Nirmala Sitharaman, mentioned that MSMEs need not just support, but to be made strong and capable—especially at a time when global circumstances are changing rapidly. In such a scenario, the question arises: 'Despite so many initiatives and schemes, why are many small businesses unable to take full advantage of them? Is lack of awareness a major reason, or are processes still so complex that people stop midway?'
Dr. Sanjay:
You mentioned Honorable Sitharaman Ji's speech—she also stated that we need to create a dedicated cadre, which they call Corporate Mitra.
What will a Corporate Mitra basically do? She has also given guidelines to ICAI to prepare Corporate Mitras. The Corporate Mitra will address the human resource challenge I was referring to earlier. A Corporate Mitra will be a resource or cadre that supports MSMEs in their daily operational needs.
For example, right now, if any MSME wants to open an enterprise, their monthly expenses include hiring a CA for GST filing and someone for bookkeeping. Then, suppose they need a small website, they need an IT company or hosting company to build it. If they want to do some PR, they need a branding company. So, for every small thing... and if they want to sell products on GeM (Government e-Marketplace), they need a GeM expert or portal expert to draft their proposals and handle business development.
The cadre that the government is trying to build will act as a one-stop solution. For example, if I am a Corporate Mitra, I can support that MSME in every sense—not only managing their GST filing, but also bookkeeping, setting up a small website, handling a social media page, and everything else.
So, the government is taking note that an MSME cannot afford individual experts or individual companies. For this, a separate cadre needs to be created, and the government is focusing on it.
Now, regarding your question about whether they are aware of these things or not—naturally, as I explained in my first answer, if an MSME raises a bill, they should get their money within 45 days; it's a very simple rule created by the Government of India. But whether there is awareness of that rule or not is critical. It's possible the MSME doesn't know, or the corporate knows they have to pay the MSME but avoids doing so. So, awareness is a major challenge regarding their rights and rules.
Another thing: if you look at the 8.5 crore MSMEs and segregate them, roughly 3.5 crore are in service lines, 3.5 crore are traders, and over 1.5 crore are hardcore manufacturing units—they are actually making something. Now, if they are manufacturing, it means the government buys things too. But if you go to the GeM portal, not all 1.74 crore manufacturers are registered as sellers—only around 22 to 23 lakh are.
So, those 1.74 crore who are actually manufacturing products can onboard themselves onto the GeM portal. That's an awareness area—they can register themselves as sellers/manufacturers. Even service providers (setting traders aside) can do the same. So, the second challenge is awareness.
The third thing, I feel, is that regarding the acts and rules created by the government, MSMEs lack understanding about incentivization. For instance, under the SFURTI scheme, the government incentivizes MSMEs and artisans. The understanding of different schemes and what incentives apply to which enterprise is where people like us come in to mentor them—to tell them, "This is your enterprise, and it is eligible for these specific incentives." For example, if I manufacture textiles, what incentives can I claim? That is where the role of a consultant comes in.
Kanishka Gulati:
Sanjay, wouldn't it be correct to say that if Corporate Mitras are created, it will lead to more employment generation and job opportunities in the MSME sector? What are your thoughts on this?
Dr. Sanjay:
Absolutely, jobs will be created. Secondly, their operational costs will decrease. For example, if their operational cost is ₹10 today, it will naturally drop to ₹2 because right now, they are paying for four to five types of services: CA services for tax filing, a small IT company for website setup, a PR/social media agency for Amazon/e-commerce handling, and proposal-writing help for GeM submissions. They pay for all these transactionally without a fixed cost model. If their cost is ₹2,000,000 annually, it could naturally come down to ₹50,000.
While digital enablement is being discussed, many micro units in the unorganized sector are still stuck in paperwork. What should be the biggest step to integrate them into the digital ecosystem?
When any country moves forward, initially we anticipate things as a nation—we made labor laws and various regulations. But over time, we relaxed them too. We have seen many relaxations for MSMEs over the last 4 to 5 years.
Regarding moving from the unorganized to the organized sector: at the junction where we stand today, we have only 8.5 crore formal registered MSMEs. What is the potential? The potential, in my view (I may be wrong), is huge. For example, Gujarat as a state believes they alone have 7.5 lakh MSMEs. Chandigarh, a small UT, believes they have around 1 lakh MSMEs.
So every state, as well as the country, has massive potential. I feel that while 8.5 crore are registered, the actual potential is between 30 to 35 crore—meaning 20 to 25 crore are currently informal. For instance, a street vendor operates under their own name or a relative's name individually.
So, the first challenge is bringing them into the formal sector. The first step for the country and every state is onboarding them through formalization. States are taking different initiatives; Chandigarh did it recently, and Gujarat released a scheme to formalize all street vendors.
Second, once you formalize them, what next? You shouldn't just formalize and leave them. Since they are no longer just individuals but enterprises, they will face compliance requirements. Now, to support this formalized ecosystem, we discussed creating Corporate Mitras. Documentation, particularly for MSMEs, has been significantly reduced.
The real challenge is that they simply don't know. The challenge is awareness and fear. For example, let me give you a crude example. I recently visited a NASSCOM center where startups were incubated. They arranged a lecture for me to address these NASSCOM-incubated startups on how they could benefit from government schemes.
To my surprise, none of the startups were interested in taking government incentives. Why? Because they believed taking money from the government isn't easy. So, what was on their mind? "I will make a plan and sell equity to investors who want to invest in my idea."
So, regarding what the government is doing—providing incentives, seed funding, or sector-specific grants (like the Department of Biotechnology giving grants like BIG, SPARSH, or BIRAC, or similar grants in agriculture)—every ministry gives grants and seed money to develop enterprises in its sector. But along with a lack of awareness, there is fear. They think dealing with the government is tough. That is the perception we need to erase.
Kanishka Gulati:
Throughout our conversation, we discussed the challenges, opportunities, and policy support for MSMEs. Linking this with the vision of Viksit Bharat 2047, I would like to understand from you: 'how can MSMEs move beyond being just employment generators to becoming true growth multipliers?'
Dr. Sanjay:
If you look overall, after agriculture, the largest employer is the MSME sector in the Indian context. Leaving agriculture aside, MSMEs are the biggest employer. Currently, it contributes over 30% to the GDP through various manufacturing activities.
Now, to maintain or increase this contribution for Viksit Bharat—earlier, our entire GDP was dependent on agriculture. If we look post the Green Revolution in the 1960s, industry grew, and post-1990s reforms, we moved toward the service sector. That's how the shift happened.
What we need to think from the perspective of Viksit Bharat is that, first of all, we must turn every individual into an entrepreneur; we cannot rely solely on wage employment in the long run. To achieve Viksit Bharat, we have to create entrepreneurs and build MSMEs.
Simran Sadana:
Sanjay, you mentioned that MSMEs play a crucial role in Viksit Bharat. In this context, 'how is Forvis Mazars working with this sector, and how is it contributing to its growth?'
See, first things first: if any MSME comes to us, we can give them—as you mentioned holistic—holistic guidance. We have the capability and competence, and we are already doing this.
First things first, no matter what sector they belong to, or whatever idea they come with, we can tell them: "Brother, which schemes are you eligible for, what incentives can you get, and where can you sell your goods?" First is this. We can act as their mentors in a way.
Second thing, leave MSMEs aside for a moment. Suppose an entrepreneur comes to us with an idea and says, "I want to set up a factory." He wants to set up a factory, let's say starting with a small investment of ₹1 crore—that also falls under MSME. So, we can guide him on where he can set up the factory: whether it will be better for him in Haryana, Rajasthan, or Uttar Pradesh, and which government gives better incentives to set up.
So, in both ways: one is we can do policy advocacy in terms of, you know, giving him the evidence and data points to take decisions on where to set up his factory. Once he sets it up, we can provide compliance support. We have a separate tax team, a separate audit team—so all these financial aspects, we have a separate division for everything.
And as a social sector, we can help them in drafting different kinds of proposals which they can submit to the government for incentivization or for any kind of seed funding.
We also have an equity team that can actually help them take it to the next level—whether taking them to an IPO, you know, or finding an investor for them—all of that, I think, we can do.
Kanishka Gulati: With this, today's discussion comes to an end. Sanjay, thank you very much for sharing your insights with us.
Dr. Sanjay: Thank you so much.
Simran Sadana: And to our listeners, we hope this conversation provided you with a clear perspective on the realities of the MSME sector and its future possibilities.
Kanishka Gulati: Stay tuned for more such conversations on The Thoughtline, available on YouTube, Spotify, and Apple Podcasts. If you have any questions or if there is a topic you would like us to discuss, write to us at thoughtleadership@mazars.co.in. This episode was prepared with research support from Devesh, Rajita and Anukriti, and was produced and edited by Taranpreet and Swati.