The Indian Manufacturing MSME Paradox: Backbone Without a Growth Spine
Sanket Kapadnis, Founder, ThinkSDG Advisors
Introduction
India’s manufacturing MSMEs are the quiet workhorses of the economy. They contribute roughly 30% to GDP and account for nearly half of the country’s merchandise exports, employing millions across clusters ranging from textiles in Tirupur to auto components in Pune and Nashik. Yet, despite their economic significance, most MSME manufacturers operate on the margins of growth, unable to scale, formalise, or fully harness technology and finance.
This paradox—being critical to the industrial ecosystem but structurally constrained—reflects deeper market, policy, and operational failures that remain largely invisible to policymakers and industry observers alike.
The Structural Dilemma
Data from the SIDBI MSME Survey 2025 highlights that more than 60% of manufacturing MSMEs cite access to credit and working capital as their top constraint, followed closely by labour skill shortages and outdated technology adoption. Meanwhile, ICRIER’s Annual MSME Survey (2025) found that MSMEs that digitally adopt even basic bookkeeping and order-tracking systems grow 30–40% faster than peers with similar product portfolios.
However, the reality on the ground is stark: most enterprises remain micro-managed, founder-driven, and highly dependent on informal financing, leading to low productivity, high risk, and limited market reach. In clusters like Rajkot and Nashik, anecdotal evidence shows factories running on decades-old machines, relying heavily on a single buyer, and plagued by intermittent cash-flow shortages.
Why Growth Remains Elusive
Several intertwined factors create this stagnation:
1. Finance and Credit Access
Banks and NBFCs still require substantial collateral and formal documentation, which small units often cannot provide. Consequently, MSMEs depend on short-term informal lending or delayed buyer payments, creating a cycle of liquidity stress.
2. Technology Adoption Gap
Legacy machines, manual processes, and low digital visibility inhibit productivity improvements. The cost and complexity of automation—perceived as CAPEX-heavy—dissuade owners from investing in scalable solutions.
3. Workforce Skill Deficits
High attrition, informal employment, and lack of structured vocational training reduce operational efficiency. Enterprises cannot easily onboard or retain skilled operators and supervisors.
4. Market Concentration
Many MSMEs are dependent on 1–3 buyers, often OEMs, leaving them vulnerable to delayed payments, price pressure, and contract risk.
5. Compliance Complexity
The multiplicity of statutory requirements (GST, labour, environmental regulations) increases operational overhead, particularly for units that do not yet have digital records.
The Case for a New ApproachThe solution is not merely more subsidies or piecemeal support; it is structural reform coupled with practical adoption pathways. Manufacturing MSMEs need to:
- Digitalise operations and financial records to improve credibility with lenders and buyers
- Adopt modular, low-risk automation to improve throughput and quality without heavy CAPEX
- Leverage supply-chain finance platforms like TReDS to manage receivables
- Cluster-based procurement and shared services for utilities, training, and compliance
- Build governance frameworks to reduce founder dependency and enable scaling
Globally, small manufacturers that integrate digital finance, lean automation, and governance practices achieve faster growth and market resilience, and Indian clusters are no exception. The challenge lies in accessibility, awareness, and adoption rather than technical feasibility.
A Call to Owners and Policymakers
For MSME owners, the imperative is clear: treat formalisation, technology adoption, and finance not as optional administrative tasks, but as strategic levers for growth. For policymakers and ecosystem partners, the task is to design intervention pathways that reduce friction, such as:
- Streamlining scheme access (CLCSS, ZED, PMEGP) with cluster-based handholding
- Incentivising micro-automation pilots via co-funded initiatives
- Promoting supply-chain financing adoption across OEMs and channel partners
The promise of India’s manufacturing MSMEs can only be realised when policy, finance, technology, and operational practices converge. For owners willing to embrace this convergence, the next 3–5 years offer unprecedented opportunity: to expand capacity, modernise processes, and reach new markets—locally and globally.
Next in the 12-Part Series
For years, policymakers have insisted that credit for MSMEs is plentiful. Yet on the ground, most small manufacturers still find themselves negotiating cash flow month to month. In Week 2, we examine why this gap persists — from collateral expectations and lender caution to emerging finance models that may finally offer practical relief.
About the Author: Sanket Kapadnis is the Founder of ThinkSDG Advisors. He works on MSME capacity-building, market linkages, investment-readiness, and sustainability-oriented development models.