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The Importance of Small and Medium Enterprises in the Indian Economy


Small businesses have been the backbone of the Indian economy for centuries, providing employment to millions of people and contributing to the country’s growth. Over the past few years, the growth of small businesses has accelerated, with more and more entrepreneurs setting up shop in the country. We will take a comprehensive look at the ways in which small businesses are contributing to the growth of the Indian economy. and various factors influencing their growth and how they are helping to create new jobs and spur economic growth. 

Before we delve into the importance of MSMEs in the Indian Economy, it is essential to understand the new classification of Aatma Nirbhar Bharat Abhiyan 2020. According to Abhiyan, MSMEs are classified as:

  • Micro Enterprise – Any business with an investment of not more than INR 1 crore* is termed a micro-enterprise or micro-business.
  • Small Enterprise – Any business with an investment of more than INR 1 crore but less than INR 10 crore is termed a small business or small enterprise.
  • Medium Enterprise – Any business with an investment of more than INR 10 crore but less than INR 50 crore is termed a medium enterprise or medium-scale business. 
  • *1 crore = 10 million

Small and medium enterprises are a vital part of the Indian economy and continue to make significant contributions to the country’s socio-economic growth. These enterprises create job possibilities and contribute to the development of the country’s backward and rural areas. As per the national sample survey (2019), MSMEs employ over 46.6 million people. 

Role of MSMEs in the Indian Economy

Since their formation, MSMEs have proven to be a highly dynamic sector of the Indian economy. MSMEs produce and manufacture a variety of products for both, domestic as well as international markets. 

MSMEs play a crucial role in providing employment opportunities in rural areas and also help in the industrialization of these areas with a low capital cost as compared to large industries. Acting as a complementary unit to large sectors, the MSME sector has contributed enormously to its socio-economic development. 

MSMEs also contribute and play an essential role in the country’s development in different areas like the requirement of low investment, flexibility in operations, mobility through the locations, low rate of imports, and a high contribution to domestic production. 

  • Large-scale employment 

Enterprises that are inclusive in this sector require low capital to start up new businesses. It creates a vast opportunity for employment for people. Small businesses provide immense opportunities in rural and semi-urban areas and the weight of unemployment faced by the Indian economy is lifted by these small businesses. MSMEs are considered a boon for the fresh talent in India. 

  • Economic Stability 

Considering the contribution of MSME to manufacturing, exports, and employment, other sectors also benefit from it. MNCs buy semi-finished, and auxiliary products from these small enterprises which help in creating a linkage between MSME and big companies. 

  • Contribution to local government with taxes

A thriving local business generates high revenue levels, which means they also pay higher taxes. The small business’s impact on local economic growth also takes the form of sales tax collection. 

Another great characteristic of small businesses that makes them dependable is that despite having informal sources of funding, small and medium enterprises do their best to perform based on the available resources. They often, or say in most of the cases fall short of resources but they try to manage the situation with small credits arranged from personal or collaterals, if available. Thus, if an economy has such a driving force behind it that is determined to do whatever it can to play its role, then the economy is sure to have a bright future. 

The government of India realizes and recognizes the importance of the MSMEs and had come to rescue the ailing economy due to the worldwide slowdown and economic downturn following the COVID-19 pandemic. In order to assist the Indian economy to recover from the inadvertent crisis of economic slowdown, Prime Minister Narendra Modi and his government have come up with a unique plan – The Atmanirbhar Bharat Abhiyan which is an effort to make India self-reliant and self-sufficient, independent in every aspect so that its dependence on other nations can be brought down to a bare minimum level. 

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