MSME Bill Fails To Address All the Sectoral Challenges

Chennai: The MSME Development Amendment Bill being presented in Parliament is trying to address just a few challenges faced by MSMEs, such as delayed payments, dispute resolution and easing some of the compliance burden. However, it fails to address several other key structural challenges, and implementation remains a major concern, finds Anil Bharadwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises (FISME).

Before we discuss the MSME Development Amendment Bill, could you briefly explain the biggest challenges faced by the MSME sector today?

The traditional challenges continue to dominate the sector. The first and most serious problem is delayed payments. MSMEs often do not receive payments on time for supplies made to large companies, public sector enterprises or even government departments. The second major issue is access to affordable finance. This remains one of the most common complaints across the sector, with smaller enterprises finding it much harder to obtain funding than larger businesses. The third challenge is the growing compliance burden. Since the introduction of GST, compliance requirements have increased significantly. This is in addition to labour regulations, environmental standards, quality control requirements and various approvals that require considerable time and resources. The fourth challenge is technological upgradation. Technology is evolving rapidly and businesses are constantly expected to improve their products and services. Many MSMEs simply do not have the financial capacity to upgrade machinery or adopt new technologies. This ultimately affects their competitiveness because imported products are often cheaper and of better quality, making it increasingly difficult for Indian MSMEs to compete.

The government says the new MSME Bill will solve the delayed payment problem. But we already have the TReDS platform, which mandates payments within 45 days. How does this Bill improve the situation?

TReDS is essentially a platform that facilitates financing and transactions between buyers and suppliers. While registration is mandatory for companies above a certain turnover threshold, TReDS itself is not a regulatory mechanism. The delayed payment provisions under the MSME Act are different because they create a legal obligation for buyers to make payments within a specified period. If payments are delayed, penal interest becomes applicable. The 45-day timeline provides a limit, while banks can finance supplies made by MSMEs before payments are received. Therefore, TReDS and the MSME Act complement each other. So, do you believe these amendments will finally solve the delayed payment problem?

I would not say they will solve the problem completely. The amendments represent a positive step, but they are not a complete solution. This is not an entirely new law but a set of limited amendments. One of the key changes is the introduction of Online Dispute Resolution (ODR). At present, MSMEs can approach the MSME Facilitation Councils when buyers fail to make payments. However, the process is often slow because filings are physical, hearings require personal appearances and efficiency varies significantly across states. ODR aims to digitise the process so that hearings can take place remotely, reducing delays and making dispute resolution much faster. The Bill also proposes increasing the number of Facilitation Councils. Will that improve implementation? Implementation has always been the bigger concern. Even when Facilitation Councils pass orders in favour of MSMEs, ensuring those orders are enforced remains a challenge. That requires broader legal reforms extending beyond the MSME Act itself.

The Bill also talks about reducing the compliance burden. MSMEs deal with GST, labour laws, environmental approvals, factory regulations, quality standards and multiple licences. Does the amendment provide meaningful relief?

The Bill provides some relief, but only within the scope of the MSME Act. It gives statutory backing to the Udyam portal, facilitates easier sharing of data with lenders and government agencies and reduces certain penal provisions for procedural lapses. However, the larger compliance burden arises from several other laws, including GST, labour legislation, environmental regulations and income tax provisions. The MSME Act cannot override these legislations. Therefore, while the amendments reduce compliance under one law, they do not significantly reduce the overall regulatory burden faced by MSMEs. The Jan Vishwas Bills are likely to have a much greater impact in reducing compliance across sectors.

Finance continues to be one of the biggest concerns for MSMEs despite schemes such as CGTMSE. What more needs to be done?

Finance is a complex issue because lending always involves risk. Banks deal with public money and naturally remain cautious while extending credit. CGTMSE has certainly been a useful mechanism because it guarantees a large portion of the loan amount in the event of default, thereby reducing the lender's risk. However, banks continue to insist on physical collateral because recovering loans through the legal system remains a lengthy process. This creates enormous difficulties, particularly for women entrepreneurs who often do not own assets that can be pledged as collateral. Stronger credit guarantee mechanisms are needed to encourage banks to lend without insisting on physical collateral.

You also mentioned insolvency reforms. Why are they important for MSMEs?

This is another critical gap. The Insolvency and Bankruptcy Code primarily applies to companies, whereas nearly 97 per cent of MSMEs operate as proprietorships or partnership firms. These businesses do not have access to the same legal protection available to companies. If a business fails, the entrepreneur often has no structured mechanism to recover and restart. India needs an insolvency framework specifically designed for proprietorships, partnerships and individual entrepreneurs so that business failure does not permanently destroy livelihoods. Entrepreneurship always involves risk, and there must be a fair legal mechanism that allows genuine entrepreneurs to recover from failure and start again.

During the pandemic, the government introduced collateral-free emergency credit schemes. How successful were they?

They proved to be quite effective. According to an NCAER study, nearly ₹1 lakh crore worth of non-performing assets were prevented because of these schemes. The scheme was available only to MSMEs that already had existing loans, but it provided much-needed liquidity during an unprecedented crisis. Most businesses eventually repaid these loans as economic activity recovered. Similar support has now been extended to exporters affected by geopolitical disruptions. Given the increasingly uncertain global environment, such credit support mechanisms should not remain one-time emergency measures. MSMEs are particularly vulnerable because the failure of one major buyer or one global crisis can threaten their survival. A permanent framework that provides temporary liquidity support during extraordinary circumstances would significantly strengthen the resilience of the sector.

Technology is advancing rapidly across the world. How can Indian MSMEs keep pace?

Technology adoption requires a coordinated approach. MSMEs usually operate in clusters where firms use similar machinery and production techniques. Therefore, technology upgradation cannot be viewed only from the perspective of individual enterprises. We need to work closely with machinery manufacturers, engineering institutions, IITs, CSIR laboratories and other research organisations. The first step is to identify product categories where Indian MSMEs are losing competitiveness to countries such as China or Taiwan. Once those technological gaps are identified, targeted collaboration between industry and research institutions can help bridge them. FISME has consistently advocated the creation of a National Technology Mission for MSMEs that focuses on upgrading technology at the cluster level.

Manufacturing today is driven by global value chains. Are Indian MSMEs ready to become part of these networks?

The opportunity has never been greater. The China Plus One strategy is now a reality, and global companies are actively searching for alternative manufacturing destinations. India satisfies many of the conditions needed to attract global value chains. However, policy support needs to extend beyond large corporations. While Production Linked Incentive (PLI) schemes have delivered encouraging results in some sectors, similar incentives and financial support should reach MSMEs as well. Medium-sized enterprises are far better positioned to participate in global value chains than micro enterprises. Unfortunately, out of nearly eight crore MSMEs, India has only around 25,000 medium-sized enterprises. That number is far too small for a country aspiring to become a global manufacturing hub.

Do the present definitions and incentives encourage businesses to remain small instead of growing?

The definition of MSMEs is not the problem. The problem lies in the incentives built into various laws. Many benefits, including delayed payment protection, are available only to micro and small enterprises. The moment an enterprise grows into the medium category, several of these protections disappear. This creates a psychological and financial disincentive to expand. Instead of growing into one larger enterprise, many entrepreneurs choose to establish multiple small units simply to continue enjoying the available benefits. Similar thresholds exist in labour laws, where crossing a particular employment level significantly increases compliance requirements. These policy distortions create an artificial glass ceiling that discourages natural business growth.

Finally, do you believe the new MSME Development Amendment Bill will resolve the sector's major challenges?

The Bill is relatively modest in its scope. It addresses three limited issues—improving delayed payment mechanisms through Online Dispute Resolution, easing compliance within the MSME Act and strengthening certain institutional processes. These are welcome changes, but they do not address the broader structural challenges facing the sector. If India wants MSMEs to become globally competitive, generate more employment and integrate into global value chains, much deeper policy reforms will be required. Finance, technology, industrial policy, insolvency reforms, compliance rationalisation and incentives that encourage firms to grow all need comprehensive attention. Only then can MSMEs evolve into larger, globally competitive enterprises capable of playing a transformative role in India's manufacturing exports and long-term economic growth.