THE growth of micro, small and medium enterprises, considered the backbone of emerging economies, has for long been caught in the web of formalisation, or the lack of it, which prevents them from accessing the finance that they need to increase their productivity. The 2024 Bureau of Statistics data show that there are 11.7 million MSME entities, but only 3.28 million of them, or 28 per cent, are formal and 7.55 million of them, or 64.59 per cent, are informal. Because of the informal nature of the entities, they cannot access finance from financial institutions that need transaction records, sales data, digital payment records, utility bills and supply-chain information to offer loans. The entities, therefore, run below their potential. The pieces of information are also essential for such entities to forecast demand, manage inventory and expand production. Of the entities, as the 2024 data say, 7.39 million, or 63.11 per cent, are located in rural areas while 4.32 million, or 36.9 per cent, are in urban areas. Technological drawbacks also hold such entities back as smartphone penetration is reported to have reached 72.8 per cent in 2025, but access to the internet in rural areas remained below 38 per cent.
Such a large number of MSME entities account for only about 27 per cent of the gross domestic product although, as experts view, with proper support, both financial and administrative, they could increase their share of the gross domestic product to as much as 50 per cent. The entities cannot prove their creditworthiness to financial institutions although they are commercially viable. The financial institutions cannot effectively lend support to MSME entities as they cannot provide reliable, formalised data on their trade. And, MSME entities, which mostly run informally, appear unwilling to come under a formal fold, fearing that such a proposition would subject them to additional regulatory requirements and tax obligations. Although the government has earlier made provisions for incentives, as it happened during the Covid outbreak, the financial institutions remain weak in disbursement or even unwilling. But, the government has not been able to impress on MSME entities that formal registration would ultimately do them good. Experts think that the government could offer temporary regulatory and tax relief for such enterprises at least for some years. Some have spoken of creating a reliable, comprehensive MSME database, which will help in accurate risk assessment for formal bank credit.
A unified national database of MSME units could be of great help to such entities in extending policy and financial support to fully harness their potential. The government should put in efforts to ensure reliable, verifiable data on MSME units along with comprehensive data protection legislation and to remove the high level of informality that they are mired in.
