MSME Classification: Definition, Characteristics, Importance | MSME UPSC

By BYJU'S Exam Prep

Updated on: November 14th, 2023

MSME stands for Micro, Small, and Medium Enterprises. This sector has emerged vibrantly in the Indian Economy. MSMEs can be seen as complementary to large-scale industries and contribute to a great percentage of the Indian economy and socioeconomic development. The MSME sector produces a wide range of products, from simple consumer goods to finished products. It contributes around 29% to the nation’s GDP.

MSME UPSC notes are available in this article which must be studied thoroughly by the aspirants. They can download the PDF below to learn about the MSME classification, limitations, characteristics, and importance. Several questions about these concepts are often asked in the UPSC Prelims and Mains examinations.

What is MSME?

Micro Small and Medium Enterprises (MSMEs) were introduced by the government through the MSME Act, 2006. Micro, Small and Medium Enterprises are engaged in the production, manufacturing, processing, or preservation of goods and commodities subject to limits of investment. The government revised the MSME definition in 2020 to boost its growth.

MSME Definition

MSME new definition eliminates the distinction between manufacturing and services enterprises and also increases the investment and annual turnover criteria for such enterprises. The new definition of MSME was announced in the Atmnirbhar Bharat package and expanded the investment and turnover limit.

MSME Classification

The MSME classification into Micro, Small, and Medium Enterprises based on investment in plant and machinery equipment are as follows:

  • Micro – the investment in plant and machinery equipment will not be more than 1 crore, and annual turnovers will not be more than 5 crores.
  • Small – the investment in plant and machinery equipment will not be more than 10 crores, and annual turnovers will not be more than 50 crores.
  • Medium – As per the MSME classification criteria, the investment in plant and machinery equipment of Medium enterprises is not more than 20 crore, and the annual turnover is not more than 100 crore.

Importance of MSME in the Indian Economy

Micro, Small, and Medium Enterprises (MSME) play a vital role in the nation’s economic development. The significance of MSME for the growth and development of the country is as follows:

  • Micro, Small, and Medium Enterprises contribute to 29% of the Indian GDP, 45% of manufacturing output, and about 40% of overall export, and it employs over 11 crore people, out of which 55% of employment happens in urban enterprises which make MSMEs the second largest employer after agriculture.
  • The Ministry of Micro, Small, and Medium Enterprises has the aim to increase MSME’s contribution to Indian GDP from 29% to 50% by 2025 to become a 5 trillion dollar economy.
  • MSMEs are also helping India by making it a manufacturing hub.
  • Micro, Small, and Medium Enterprises also help uplift backward people and tackle poverty by generating employment in rural areas through industrial development.
  • Khadi and Village Industries, with low capital investment, employ a large number of women in rural India and helps in the upliftment of rural and other backward areas.

Limitations of MSME

Along with the various advantages of MSME, there are some challenges as well on which the government should work upon. Some of the limitations of MSME, which every UPSC aspirant must be familiar with, are listed below:

  • Delay in payment even though the MSME Samadhan portal which was set up to help enable faster payments to India’s micro, small and medium enterprises.
  • Due to the lack of assets among micro, small and medium enterprises such as land and building etc., there is a huge credit gap. In 2018 approx, 40% of micro, small and medium enterprises lending was done through the informal sector means finding access to formal credit is still a challenge for MSMEs.
  • Although in just a decade, the number of women-led MSMEs in India has jumped from 2.15 lakh to 1.23 crore. They largely rely on informal sources and face a financial gap of 158 billion dollars.
  • Delay in getting access to water and power connection in the remote area.
  • Most of the micro, small and medium enterprise owners are not well educated and are from poverty-hit regions.
  • Lack of skilled manpower and labour law compliances restrict the growth of the sector resulting in a slower production process and compromise with product quality.
  • Poor infrastructure for capacity building and poor marketing strategy.
  • Lack of modern technology and modernization.
  • A study conducted by Khadi and Village Industries Commission (KVIC) revealed that due to the COVID-19 pandemic, more than 50% of MSMEs were shut down, and there was also a drop in production and revenue.
  • The COVID-19 pandemic further increased the problems like delays in payments, scarcity of raw material availability, high informality, etc.

Factors Leading to the Growth of MSME

To support MSME during the COVID-19 pandemic, the Parliamentary Standing Committee on Industry has recommended providing soft loans to micro, small and medium enterprises at lower interest rates of 3-4%. Some other factors leading to the growth of MSME in India are as follows:

  • Changing the mindset of the youth of India to become an entrepreneur and generate jobs for others.
  • By integrating with Global Value Chains (GVC) now, MSME can produce quality goods and services, which will increase their acceptability in the global market.
  • The productivity of micro, small and medium enterprise players increases with the help of campaigns like – Skill India, Digital India, Startup India, etc.

Government Schemes to Promote MSME

The following are the government initiatives to promote MSME in India for the country’s growth and development:

  • Udyam Portal – It is the portal that simplifies the process of registration of any enterprise under the MSME category. Recently, the government’s new guidelines will make wholesale and retail enterprises eligible for registration in Udyam Portal.
  • MSME Samadhan – A portal that empowers micro and small entrepreneurs to directly register issues related to delayed payments by the Central Ministries/departments/ CPSEs/ State Government.
  • Credit Linked Capital Subsidy and Technology Upgradation Scheme (CLCS-TUS) – A scheme for the up-gradation of Technology for micro, small and medium enterprises.
  • Interest Subvention Scheme – For the incremental credit to MSMEs.
  • Micro and Small Enterprises Cluster Development Programme (MSE-CDP) – An credit guarantee scheme.
  • A Scheme for Promoting Innovation, Ruler Industry and Entrepreneurship (ASPIRE) – Helping in reducing unemployment and promoting a culture of excellence in entrepreneurship.
  • Scheme of Fund for Regeneration of Traditional Industries (SFURTI) – With the help of the latest modern technology, regenerates the traditional industry in a systematic way to make them competitive by enhancing their productivity and product quality.

Other Initiatives for MSME

Recently Central Sector, assisted by the World Bank scheme, Raising and Accelerating Micro, Small and Medium Enterprises Performance (RAMP) has been launched under the Ministry of Micro, Small and Medium Enterprises (MSME) for supporting various COVID 19 Resilience and Recovery Intervention with the recommendation in the line made by UK Sinha committee, KV Kamath committee, and Prime Minister Economic Advisory Council.

  • Online portal ‘Champion’ – It is a grievance redressal mechanism in the MSME sector.
  • ZED Certification Scheme- It is a Zero Defect and Zero Effect practice to improve the product quality of micro, small and medium enterprises (MSMEs) by indirectly supporting the Make in India initiative.


MSME UPSC is an important topic of the Indian economy which is seen frequently in the news, so it becomes important for both UPSC Prelims and Mains exam preparation. Here we have provided some sample questions based on MSME UPSC notes.

Question – Which of the following is/are correct regarding Micro, Small, and Medium Enterprises (MSMEs)?

  1. Micro, Small, Medium Enterprises introduced by MSME Act, 2006.
  2. For Small Enterprises the investments should not be more than Rs 10 crores.
  3. This sector generates the highest number of employees.

Choose the correct Option:

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. All of the above.

Answer – A

Question – Which of the following is correct regarding MSMEs?

  1. Udyam Portal provides single-page registration of MSMEs.
  2. MSMEs contribute around 30% to the Indian GDP.
  3. MSMEs Samadhan Portal was set up to help enable faster payments to India’s MSMEs.

Choose the correct Option:

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. All of the above.

Answer – D

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