Today, the world over, we all are celebrating MSME Day, and there are genuine reasons to celebrate. As many as 7.86 crore small businesses that employ over 34 crore people have registered and formalised their business through the Udyam portal. MSMEs contribute 31.1% of India’s GDP, 35.4% of manufacturing contribution, and close to 50% of India’s export value. Export income from this sector has grown three-fold in just four years – from ₹3.95 lakh crore in 2021 to ₹12.39 lakh crore in 2025.
This is more than numbers. This is evidence of the livelihood that has been created by actual individuals in areas that large businesses do not venture into.
However, MSME Day should not only be celebrated but should also be a day to question what the requirements of this sector are going forward.
Why This Year Feels Different
Human Centered Entrepreneurship is the theme proposed by UN-ICSB for the year 2026. The reason behind it is simple; without making technological change inclusive, the gap between large and small companies might increase rather than reduce. It is an issue faced by India as well.
While large organizations use the concept of enterprise automation using artificial intelligence, there are many parts of MSME industry in India that are struggling with the basics of digital adoption. Research findings from 2025 suggest that although the global adoption rate in the manufacturing industry using AI is 35-40%, Indian MSMEs stand at only 15%. According to surveys, 91% of MSME business owners think that AI should be accessible to everyone but their awareness has not yet translated into adoption due to problems of costs and lack of infrastructure and knowledge about it. Some people are not even aware of how much of an impact the concept of AI has on the life of common masses. As said by Suraj, an MSME business owner in Gujarat, “We have been doing our work like this. Things are changing so quickly that we are not able to adapt. Should I run my business or learn AI?”
Meanwhile, the MSME Ministry's FY26 budget allocation of ₹23,168 crore — a 4.6% increase over the previous year — signals that institutional commitment is real. Policy apparatuses are moving, but will they catch up to the speed? Only time will tell.
The Udyam Success Story — and What It Doesn't Tell Us
Hardly any other government policy initiative has revolutionised India’s MSME space as much as Udyam.
Introduced in July 2020, it has done away with the complex registration procedure to adopt a completely paperless, self-certification, no cost method. The evidence speaks for itself – from 0.79 crore registrations in FY22, the number grew to 7.83 crore till February 2026. The Udyam Assist platform, which came up in January 2023 exclusively for informal MSMEs, has enrolled millions of businesses which had been hitherto operating outside formal channels.
There have been improvements in the entire ecosystem as well. The CGTMSE now provides collateral free guarantees up to ₹10 crore. The GeM portal has exceeded the mark of ₹5.4 lakh crore in Gross Merchandise Value and also enrolled 1.8 lakh Udyam-verified women-led businesses. The RAMP scheme has benefitted over 51 lakh MSMEs.
However, formalisation in India has its own caveat. The Annual Survey of Unincorporated Sector Enterprises conducted amongst the total 77 million businesses reveals only 0.4% have gone for Udyam registration. The U.K. Sinha Committee's recommendation of a unified enterprise identifier across GST, Udyam, EPFO and ESIC — which would allow accurate tracking — remains unimplemented.
Formalization has successfully brought millions of small enterprises into the digital economy, but it has also exposed them to new regulatory pressures. As businesses formalise, the most immediate operational obstacle that they face is the new payment mandates brought in by the government.
The Payment Problem: Right Diagnosis, Incomplete Prescription
Section 43B(h) of the Income Tax Act, effective from April 1, 2024, stands out as one of the most significant interventions by the government to help MSMEs. The law bars tax deductions on purchases from registered MSMEs except when payment is settled within 15 days without any written agreement or 45 days with one. In the new Income Tax Act 2025, in effect from April 1, 2026, the provision remains the same, and there is an important caveat: no relaxation on filing dates is allowed.
This is the right thing to do since late payments have always been one of the biggest drains on working capital for small suppliers.
However, the actual implementation has thrown up a sectoral problem that cannot be ignored. The loss to MSME apparel manufacturing units in the first quarter alone, estimated by the Clothing Manufacturers Association of India, would be ₹5,000 – 7,000 crore because of simple reasons: retail trade operates on credit terms between 90 to 180 days, and they have switched their business to unregistered sellers. CAIT had sought a deferment.
The point is not a return to lackadaisical payment practices but a calibration of those that currently exist. A consumer goods supply chain could manage the 45-day period without difficulty. Sectors involving capital goods, heavy textiles, and infrastructural supply chains function according to a production-to-realisation cycle that extends to 90 or even 120 days. A differential structure that would allow for 45 days in fast-cycle sectors, 90 days in medium-cycle, and up to 120 days in long-realisation manufacturing could maintain the enforcement method without creating an incentive for detouring from the registered chain. Such a proposal has appeared in industrial discussions.
While the mandated payment rule does create an immediate cash-flow problem, another persistent long term challenge for MSMEs is the credit availability, the gap between their credit requirement and actual availability is widening by the day.
The Credit Gap That Persists
The outstanding credit outstanding from scheduled commercial banks to the MSME segment was recorded at ₹36.79 trillion as on December 2025, growing at a steady CAGR of 15% in five years. But the recent NITI Aayog report revealed that less than 19% of credit requirements of MSMEs was met formally up until FY21. The SIDBI survey revealed that the sector faces an equity deficit of approximately ₹31 lakh crore.
Budget 2026-27 made some promising moves – introduction of SME Growth Fund worth ₹10,000 crore for growth-oriented enterprises, making TReDS route mandatory for all CPSE purchases, and credit guarantee schemes extended to invoice discounting under CGTMSE. In effect, an MSME delivering goods or services to the Government entity would now be able to get his invoice discounted through the financier with CGTMSE guarantee. This is a paradigm shift. The question is whether this will hit the ground fast enough. Credit shortage is very evident from the figures mentioned above, but yet, we were unable to find any solutions to this problem.
While credit crunch definitely needs immediate redressal, if the MSME sector is to scale and remain competitive in a rapidly growing digital economy, it must overcome another silent barrier and bridge the gap in technology adoption.
Technology: The Gap That Widens While We Wait
According to PayNearby MSME Digital Index Report 2026, up to 72% of MSME payments have become digital already — this is a real shift, and UPI played a big part in it. However, there is an immense gap between digital payments and AI-supported processes.
The list of the hurdles in question is quite familiar: expensive implementation, the absence of specialists, the fragmentation of digital solutions that do not communicate with each other, and poor infrastructure in places beyond the cities. The Analysis published by Outlook Business revealed that the problem is not the lack of access to AI solutions, but the digital preparedness, i.e. the basic level of structuring of data and technological capabilities that will allow AI solutions to work.
What Comes Next
Assessing the sector as a whole, it is clear that the MSME journey has reached a turning point. Formalization will have to go deeper, not only wider. A unified enterprise identification code system based on Udyam, GST, EPFO and ESIC information could allow policymakers to know what’s really going on, and not measure inclusion based on the number of registrations. Similarly, reforms around payment will have to be designed more carefully, but certainly not reversed. Section 43B(h) is the correct instrument pointed in the right direction. Differentiated cycle timeline framework per sector will help preserve discipline while eliminating the loophole.
As we move forward, credit infrastructure needs to move down the food chain. TReDS-CGTMSE linkage, Account Aggregator framework, ULI and GST trails will make a proper pathway for collateral-free flow-based lending for MSMEs, and technology adoption must take center stage - use of affordable AI technologies, cloud computing must be scaled as productivity investments for businesses across the country.
Indian small business owners are not looking for hand-outs. They are asking for an ecosystem in which they could compete based on merits. On this MSME Day, that may be the most meaningful thing to build — not a better celebration, but a better set of conditions.
(The above article was researched and compiled by Sneha Tiwari, Senior Content Writer at TradeIndia. An avid reader, Sneha writes on various topics, including business, fashion and sports.)
