MSME Growth Remains Concentrated Despite Expanded Policy Support: Piramal Finance

New Delhi, Jun 4 (KNN) India has significantly expanded policy support for micro, small and medium enterprises (MSMEs) over the past decade, but persistent regional and sectoral imbalances continue to limit the sector's full growth potential, according to a research by Piramal Finance.
 
The report titled ‘The Geography of MSMEs: Why India’s Growth Is Concentrated, Not Broad-Based’ noted that MSMEs contribute nearly 30 percent to India's GDP, account for more than 45 percent of exports and provide employment to over half of the country's workforce, making the sector central to India's economic growth strategy.
 
Policy Support Expands Over The Decade
 
Since 2014, the government has rolled out a series of initiatives aimed at improving formalisation, credit access, entrepreneurship, technology adoption and market competitiveness. 
 
Programmes such as Udyog Aadhaar, Startup India, Stand-Up India, MUDRA, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Udyam Registration and the Emergency Credit Line Guarantee Scheme (ECLGS) have helped expand formal lending and enterprise creation.
 
The report said policy priorities have gradually evolved from financial inclusion and regulatory simplification to innovation, sustainability, export competitiveness and digital integration.
 
Growth Remains Concentrated In Select States
 
However, it highlighted that MSME growth and credit distribution remain heavily concentrated in a few states and industrial clusters. Maharashtra, Uttar Pradesh and Tamil Nadu account for a significant share of MSME activity, while several states continue to lag in industrial development and access to formal finance.
 
According to the analysis, even within leading states, MSME activity is concentrated in a limited number of districts, creating vulnerabilities to localised economic, climatic or sector-specific disruptions.
 
Large Credit Gap Persists Despite Lending Push
 
The report also pointed to a substantial credit gap in the sector. Although formal lending has expanded through government-backed schemes, nearly 42 percent of registered MSMEs have never accessed institutional credit. The overall MSME credit gap is estimated at around Rs 30 lakh crore.
 
States such as Uttar Pradesh and Bihar, despite having large MSME populations, receive a relatively lower share of formal credit, reflecting challenges related to banking penetration, collateral availability and enterprise formalisation.
 
The study further observed that credit guarantee programmes have expanded significantly since FY20, helping reduce lender risk and improve credit flow. However, the benefits have largely followed existing patterns of industrial concentration, resulting in uneven distribution across regions.
 
Sectoral imbalances also remain a concern. Many MSMEs in northern and eastern India are concentrated in trading activities, which typically generate lower value addition than manufacturing. In contrast, states such as Gujarat and Tamil Nadu have a stronger manufacturing-oriented MSME base.
 
Report Recommends Targeted Regional Strategy
 
The report called for geographically differentiated credit strategies, greater support for emerging industrial clusters in Tier-2 and Tier-3 cities, improved targeting of credit guarantee schemes and stronger efforts to promote manufacturing and value-added services.
 
It added that as India pursues its Viksit Bharat vision and seeks to expand manufacturing's contribution to the economy, MSME policy must increasingly focus on improving productivity, reducing regional disparities and ensuring balanced credit distribution rather than solely expanding overall lending volumes.
 
(KNN Bureau)