Decoding MSME vs. SME: Why the Distinction Matters for Indian Businesses

Introduction

As an entrepreneur, you want your business to flourish. Setting up the appropriate strategies, however, begins with an accurate classification of your business. Is your business classified as an MSME or a SME? Understanding the differences between various types of businesses is important for not just classification, but for effective planning, and determining eligibility for government support or benefits.

Often, people use the terms ‘MSME’ and ‘SME’ interchangeably, but they are not the same. There are significant distinctions between the two, particularly when considering the Indian context.

Read on to know more about SME and MSME, the key differences between MSME vs SME, why their distinction matters and other useful information that will help enterprises map their business journey.

What is an MSME in India?

The full form of MSME is Micro, Small, and Medium Enterprises. It is a classification that is recognised under the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. The main objective of this act is to promote and support micro, small and medium enterprises that are the backbone of the Indian economy. The MSME policy in India aims to encourage small businesses, enhance their competitiveness, increase their contribution to GDP and employment.

The MSME industry is estimated to fuel 40% of India's overall exports and 45% of the country's manufacturing output. It is believed that about 42 million people work in over 13 million MSME establishments across India.

According to the Ministry of Micro, Small & Medium Enterprises, as of July 2024, 4.77 crore MSMEs are registered on the Udyam portal, including the Udyam Assist Platform (UAP).

Similarly, according to Vi Business ReadyForNext Growth Insights Study, as of February 2025, there are around 5.93 crore MSMEs registered in the country and these numbers are continuously increasing.

The MSME classification provides enterprises with access to special provisions, better financial aid, and government incentives that can accelerate their growth. The MSME classifications were further revised in July 2020 to keep pace with the evolving economic landscape of the country. Businesses are classified depending on two defining criteria: Investment in Plant and Machinery or Equipment and Annual Turnover.

Here is a table that shows the current classification of MSMEs in India:

What is an SME?

SME stands for Small and Medium Enterprises. It is a generic term that is globally recognised. The definition of SME varies from country to country. It is a flexible classification and is not necessarily based on specific investment or turnover thresholds.

SME classifications are based on several factors. Here are some of the key factors that you must know:

• Number of Employees

  The number of employees is a widely used metric for classifying small and medium-sized enterprises (SMEs).

• Annual Turnover

  Annual turnover, similar to the criteria for MSMEs, can be used in some regions to determine SME classification.

• Assets of the Organisation

  The total value of a company’s assets can also serve as an important benchmark for defining SMEs.

• Geographical Definitions

  The definition of an SME varies globally. For instance, in European countries, businesses with fewer than 50 employees are considered small enterprises, while those with fewer than 250 employees are classed as medium enterprises.

Here is a table that shows the key differences between MSME and SME:

Why the MSME-SME Distinction Matters for Your Business

The MSME-SME distinction is not just in books, but it has a tangible implication on how enterprises function and how they can aid financial support. MSMEs profit from financial aid, subsidies, and various government incentives. SMEs, being a broader category, are not necessarily eligible for such government aid. Here is a more detailed look at the benefits:

Financial Aid:

Companies categorised as MSMEs in India find it easier to secure loans and credit, as the government has strict mandates in place for prioritising lending for this sector. Enterprises that are classified as MSMEs can expect quicker processing, tax exemptions and more favourable terms and conditions when borrowing. Additionally, the Indian government offers debt restructuring programmes for MSMEs dealing with financial distress. MSMEs also enjoy collateral-free financial aid, lower interest rates, and credit guarantees.

Government Subsidies and Schemes:

The government of India extends excellent support to MSMEs in the form of subsidies and schemes in terms of technology upgrades, market promotions, etc. This significantly reduces the operational costs for MSMEs and gives them an advantage in the market.

Market Opportunities:

MSMEs get easy access to specialised markets and government-backed e-commerce platforms, which aids their business growth. They usually get prioritised treatment in government procurement and tenders. This means that the government often reserves a portion of contracts specially for MSMEs.

Streamlined Business Operations:

Since MSMEs enjoy streamlined compliance and reduced regulatory requirements, there is an ease in doing business in this sector.

Skill Development Programmes:

MSMEs that are registered with the government also get additional benefits like free or subsidised access to skill enhancement programmes, which aids their business growth.

Protection from Delayed Payments:

MSMEs are entitled to claim interest on delayed payments from buyers and vendors. The MSMED Act of 2006 mandates buyers to make their payments to MSMEs within 45 days from the date of acceptance of the goods or services. After this, the buyer is liable to pay interest that is compounded monthly at three times the bank's rate.

Digital and Technology Initiatives:

The Indian government is actively promoting the digitalisation of MSMEs in India with several initiatives. Here are the key initiatives that MSMEs can leverage to grow their business:

a. Viksit Bharat @2047: It aims to position India as a developed nation in the global landscape by 2047. MSMEs play a pivotal role in this journey towards Viksit Rashtra, as they are instrumental in driving economic growth, providing employment opportunities, and adopting energy-efficient technologies to promote inclusive growth of the country.

Several government schemes have been implemented to provide financial assistance to MSMEs for sustainable investment. These include the Credit Linked Capital Subsidy Scheme (CLCSS), Technology and Quality Upgradation Support to MSMEs (TEQUP), MSME Green Investment and Financing for Transformation Scheme (MSE GIFT Scheme), and the MSE Scheme for Promotion and Investment in Circular Economy (MSE SPICE Scheme) among others.

b. Udyam Portal: It is a digital platform launched by the Union MSME ministry in 2020 to simplify the process of doing business for MSMEs in the country. It offers free and paperless registration for MSMEs, making them eligible for a wide array of critical government schemes, benefits and subsidies that accelerate their growth.

c. MSME TEAM (Trade Enablement and Marketing) Initiative The MSME Ministry launched the MSME TEAM initiative in June 2024 and allocated ₹ 277.35 crores to digitally empower 5 lakh micro and small enterprises, half of which are owned by women. This initiative supports MSMEs with e-commerce onboarding, logistics, catalogue creation, and other essential digital services.

Popular MSME Schemes in India

• MUDRA Loan Scheme:

  This scheme provides microfinance under three categories: Shishu, Kishor, and Tarun, depending on the stage of the business and the loan amount required.

• Prime Minister’s Employment Generation Programme (PMEGP)

  It is a flagship programme by the government, offering people financial aid for setting up new self-employment ventures.

• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

  This initiative allows MSMEs to receive loans from banks and financial institutions without any collateral.

• Technology and Quality Upgradation Support to MSMEs (TEQUP)

  This program promotes businesses to adopt energy-efficient and quality-enhancing technologies.

• MSME Champions Scheme:

  The MSME Champions Scheme encourages MSMEs to become not only national but also global champions. It is a technologically advanced platform that promotes grievance redressal for MSMEs.

How to Identify if Your Business is an MSME or SME?

Misclassification of your enterprise can lead to missed opportunities or delays in your business growth. So, it is critical that you classify your business correctly to make optimal use of the benefits provided by the government. Here is a quick checklist for MSME classification:

• Calculate Your Investment:

  Make an inventory of your enterprise’s investment in plants, machinery, and equipment

• Evaluate Your Turnover:

  Check the total turnover of your company for the given financial year.

• Check Employee Count:

  Although this is not a criterion under the MSME classification, it is commonly used globally as a metric to classify enterprises.

The Bottom Line

To conclude the MSME vs SME debate, while SME is a broader term used to describe smaller and medium-sized enterprises across the globe, MSME is a legally defined category for Indian enterprises designed to foster and support the backbone of its economy.

Having a thorough understanding of the key differences between MSME and SME is critical to avoid misclassification and avail of government benefits, financial access and compliances associated with them.

Enterprises in India that aim to sustainably grow and establish themselves in the industry must consider strategically leveraging the MSME status to access essential resources and opportunities that will take their business to the next level.

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