10 Major Problems faced by MSME Sector & their Impacts


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Challenges Faced By Msmes In India

As per the year 2014, the MSME sector of India has been able to increase its GDP share by 2.6%, which includes 18.7% exports and 10.2% imports. It generated direct employment for 8 million people and contributed a total turnover of US $192 billion (Indian Rupees). While there are many challenges ahead for both the MSME sector as well as their impact on many aspects in India, one of the major issues is lack of visibility with certain sectors like Industrial Investment, leaving many new generation firms without commercial opportunities in this sector.

Industrial investments in the MSME sector as well as their MSMEs have been severely affected by several factors; some of them are ‘external’ while many other challenges are also ‘internal’. It is important to understand the various challenges being faced by the MSMEs, which will impact them and their future. These challenges can be categorized into external and internal factors, where internal factors may be further divided into four sub-categories. The external factors include the overall financial health of India, where the case has shown that despite having a huge potential for growth in exports, their total exports have only risen by 5%. Some other examples of such challenges include global macroeconomic conditions. With the help of this article, we are going to further highlight the various issues being faced by the MSME sector along with their negative impacts.

What is Msme Sector, And What is Its Role in The Real World?

MSMEs are not just any small firms. They offer employment to one-third of 1.2 billion people in the world who work in the informal sector and generate services for other sectors like small and large industries, retail, tourism, transportation, construction, etc. But today, many sub-sectors within MSMEs face challenges in attaining their rightful share of the market, which will undoubtedly have a significant impact on their performance as well as future growth outlook. While there are some major challenges faced by such sub-sectors like Construction, Retail, etc., they still require to be inculcated and incorporated within the MSME ecosystem.

Some of The Major Challenges Faced By The MSME Sector:

Below is a list of some of the major challenges faced by MSMEs that have a significant impact on their growth prospects:

1) Financial issues:

In the Indian economy, access to finance has always been an issue for smaller firms and businesses. This is a major hindrance for businesses as well as the MSME sector. However, the most disturbing fact about it is that only 16% of SMEs get access to timely finance, resulting in small and medium firms being forced to rely on their own resources. It is not just small firms that face this problem, but larger firms do as well because even those bigger players face significant difficulties in accessing cheaper credit from formal banks. 

2) Regulatory issues:

Several regulatory issues have been identified over time, including problems like tax compliance and changes to labor laws which have ended up costing the MSME sector dearly. In an attempt to make this sector more competitive among others, certain labor reforms were attempted some years back. Still, they failed to make any dent in improving things for MSMEs despite making them more competitive than larger firms. As a result, it has become very difficult for MSMEs to comply with these regulations and register for tax compliance, which has resulted in many operating on low capital or even shutting shops.

3) Infrastructure:

In India, the infrastructure sector is extremely important because we are often referred to as the ‘world’s back-office because so many works in this sector are carried out overseas. Applications such as eCommerce and BPO have created more jobs in low-wage countries like India. 

4) Low productivity:

MSMEs are not necessarily very productive, but they perform certain tasks that emit more value than they produce. Retailers sell consumer goods to end-users at relatively lower prices. In fact, MSMEs may be very productive only when it comes to being cost-efficient and are capable of creating high volume at very low costs. But given that their production is on a small scale with low margins, low productivity can put them at a disadvantage, especially when compared with larger firms.

5) Lack of innovation:

Indian MSMEs are not very innovative, and the majority of the products that they produce are based on outdated technologies. There is a severe lack of entrepreneurs in this sector, which has prevented it from adopting new technologies and tools which have brought about significant changes in other sectors like eCommerce and call centers, etc. As a result, MSMEs have had to struggle with outdated technology as well as low levels of productivity, especially when compared with larger firms.

6) Technical changes:

There has been no dearth of technical changes over time, and most industries have undergone some form of change in order to remain competitive. As a result, Indian MSMEs have had to deal with some very important changes which have affected their growth potential. At first, there was a change in the ownership right of land, which has made the sector more prone to mismanagement and, with it, a fall in productivity.

7) Competition:

Due to various factors, such as the rise of eCommerce and the advent of globalization, bigger firms have forced MSMEs out of their markets. However, this is not new because MSMEs were facing competition from year one, but they could fight it off successfully compared to professional firms. In fact, MSMEs continue to face competition in many areas, including agricultural machinery, garments, and tourism.

8) Skills:

When it comes to skills, Indian MSMEs are far behind their counterparts in other countries because they depend heavily on the help of informal workers, who are not paid well and lack the technical skills which can help enhance productivity. As a result, smaller firms are forced to take up jobs that require low levels of skill and expertise, which further affects their growth prospects in the long term.

9) Lack of professionalism:

A majority of Indian MSMEs lack professionalism despite being vital for larger industries’ growth. As a result, they are highly prone to corruption and abuse of power, which has a huge impact on the productivity of their businesses. 

10) Lack of standardized policies:

There are very few MSME policies in India. As a result, there is no consistency when it comes to MSME development as well as entrepreneurship promotion programs. However, positive progress has been made in Delhi over the years, but this needs to be done on a national level so that Indian firms can become more competitive across the world for global companies and investors.

What is the Overall Impact of Such Challenges Faced By The MSME Sector?

Due to the low productivity, corruption, and poor working conditions, MSMEs have been struggling to ensure growth. This has resulted in the sector having a very low level of profitability and growth, which is not acceptable for the overall economy. If a healthy MSME sector is present in India, it will create a significant number of jobs that will clearly benefit the country and its people.


MSMEs face a number of challenges, but the government is doing its best to ensure that the MSME sector remains competitive. The cost of funding is gradually decreasing, and both public and private sectors are working towards developing better products that can be competitive in terms of quality and price. Perhaps, if we get rid of corruption and focus more on quality, then MSMEs will be able to beat bigger firms.

Major Challenges Faced By The Msme Sector FAQs:

1. What is the definition of MSME?

MSME is an abbreviation for & Micro, Small & Medium Enterprises, and these firms are categorized by their annual sales. Unlike large firms, small businesses have annual sales of less than Rs. 100 crore. They require less funding because of their size and they also employ less people in comparison to larger firms.

2. What are the challenges of MSME financing in India?

Challenges in Indian MSME financing include limited access to credit, high interest rates, inadequate collateral, complex documentation, and regulatory hurdles, that hinder the growth of small and medium enterprises.

3. Which are the issues facing MSMEs?

A majority of Indian MSMEs face major issues like operating from underground locations, having to deal with scams, poor working conditions, lack of skills, and low productivity. Moreover, most MSMEs are not productive and do not create much value whereas they merely perform regular tasks which they may have bought or borrowed from other firms.

4. How can we overcome the challenges of MSME?

To tackle MSME challenges, leveraging financial institutions is crucial. They provide funding and expertise for managing cash flow, addressing a major hurdle. This empowers MSMEs to sustain operations, foster employment generation, and promote economic growth.

5. What is the solution to this?

The government has set up several programs that aim at boosting MSMEs. With the help of government schemes, they have been able to increase their output. However, most programs are not set up on a national scale and there is no consistency between different states which results in low growth for the sector as a whole.

6. How can we improve the situation?

Governments across India are focusing on several measures to boost MSMEs and improve their productivity. They have also introduced various policies which aim at reducing costs such as providing land and utility subsidies to MSMEs and also improving access to finance for smaller firms.

7. What is the difference between MSMEs and other businesses?

The main difference between MSMEs and larger firms is the number of people that they employ. Larger firms tend to be more productive in terms of value-added whereas MSMEs usually focus more on low-value activities which are common for daily lives.

8. What is the percentage of small businesses operating in India?

The number of small businesses operating in India has been increasing over the years. Perhaps due to their improved ability to set up new firms, there has been a rise in the demand for products from smaller firms.

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