MSMEs (micro, small, and medium enterprises) can be considered the backbone of India’s economy in some ways. Here’s a look at some numbers: the sector employs roughly 11-12 crore people, making it the second-largest employer in the nation. MSMEs contribute to 30% of the nation’s GDP. And as of 2025, over 5.7 crore MSMEs are registered on government platforms.
These enterprises are a crucial part of labour-intensive sectors like textiles, garments, food processing, handicrafts, leather, engineering parts, and essential to rural job creation, women’s employment, and skill development. But what makes an enterprise an MSME? And who defines it? Below is a brief explainer.
What is an MSME?
In India, Micro, Small and Medium Enterprises (MSMEs) are governed by the Ministry of Micro, Small & Medium Enterprises (MoMSME). Their classification and regulatory framework are defined by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Any revisions to criteria such as investment thresholds or turnover limits are issued by the Government of India through official Gazette notifications, making the definitions legally binding and periodically adaptable to economic realities.
Registering an MSME
The registration process for an enterprise to be identified as an MSME is done via the Udyam Registration Portal managed by the MoMSME. The classification criteria (investment + turnover) is applied during registration. Today, the self-certification route has replaced previous registration mechanisms, simplifying the process.
All manufacturing and service businesses, as well as wholesale and retail trade units that meet the revised MSME classification thresholds, are eligible to apply for MSME registration. Eligibility extends to any entity that satisfies the prescribed investment and annual turnover criteria, including:
- Startups
- Private and public limited companies
- Business owners
- Individuals
- Sole proprietorships
- Partnership firms
- Limited Liability Partnerships (LLPs)
- Self Help Groups (SHGs)
- Cooperative societies and trusts
Classification and parameters: 2006 and 2020
Before 2020, under the MSMED Act 2006, MSMEs were defined primarily based on their investment criteria in plant and machinery or equipment and there were different thresholds for manufacturing vs services.
However, in 2020, the government introduced composite classification criteria, which came into effect from July 1 2020, based on two key parameters:
- Investment in plant & machinery or equipment
- Annual turnover
This move unified manufacturing and services (no separate parameters by sector) and dropped criteria such as number of employees/market capitalisation. The thresholds set were as follows:
- Micro enterprise: Investment ≤ ₹1 crore and turnover ≤ ₹5 crore.
- Small enterprise: Investment ≤ ₹10 crore and turnover ≤ ₹50 crore.
- Medium enterprise: Investment ≤ ₹50 crore and turnover ≤ ₹250 crore
2025 upward revision
Earlier this year, in April, upward revisions were made, to aid the growth of this sector. As of April 2025:
- Micro Enterprises: The revised limits allow micro units to invest up to ₹2.5 crore and achieve an annual turnover of up to ₹10 crore, compared to the earlier cap of ₹1 crore. The higher threshold enables small businesses to expand operations and build capacity without the risk of being pushed into the next category too soon.
- Small Enterprises: The investment cap for small enterprises has increased from ₹10 crore to ₹25 crore, and the turnover ceiling has doubled to ₹100 crore. This wider range creates a natural progression path, making it easier for fast-growing micro businesses to transition into the small-enterprise segment.
- Medium Enterprises: Medium enterprises can now invest up to ₹125 crore and generate annual turnover up to ₹500 crore, giving them the ability to operate at a more ambitious scale. These expanded limits open doors to export opportunities, larger capital inflows, and stronger global competitiveness.
Why classification matters
There are several reasons why classification counts, including:
- Access to benefits and schemes: MSMEs registered under the proper classification can avail of priority credit, subsidies, scheme-support of MoMSME.
- Ease of doing business: Simplified classification helps enterprises plan growth without fear of losing benefits mid-way.
- Policy targeting and procurement: Government procurement priorities often target MSMEs. A clear definition ensures eligible enterprises benefit.
- Economic planning and employment: Knowing how many enterprises fall into micro, small and medium helps policy makers track industrial development, employment creation and exports.
Small but powerful
MSMEs are not just small businesses; they are a foundational pillar of India’s economy. They drive growth, generate employment, foster innovation, support exports, and contribute to the nation’s development. Understanding MSMEs gives us clarity on who defines them, how they are classified, and what parameters are used. The MoMSME defines MSMEs under the MSMED Act; the current classification rests on two parameters (investment & turnover), applied uniformly across sectors; and the thresholds have been revised upwards to reflect the changing size and of Indian enterprises. For business owners, staying abreast of regulatory changes and classification criteria can unlock meaningful support, incentives and strategic advantages.
Sources
MSME: What is the definition of MSME
PRS India: Definition of MSMEs
Year End Review- 2020: Ministry of Micro, Small and Medium Enterprises