MSMEs: A Regulatory System Under Strain

MSMEs (Micro, Small and Medium Enterprises) are a pillar of the Indian economy, playing a vital role in growth, employment and innovation. With 6.3 crore units, the sector contributes nearly 37% of GDP, 45% of manufacturing output and more than 40% of exports. It is also the country’s second-largest employer after agriculture, supporting over 11 crore jobs.

Despite its strong economic contribution, the sector faces major challenges from a regulatory framework widely seen as burdensome and uneven, creating significant uncertainty for MSMEs.

The compliance burden is broad, complex, time-consuming and resource-intensive. Resources that could support expansion are often diverted to meeting regulatory demands. Compliance is estimated to cost Rs. 13–17 lakhs and requires navigating more than 1,450 obligations, 59 categories of inspectors and 486 imprisonment clauses, making it a serious barrier to growth.

Across sectors, MSMEs must obtain licences, permissions, approvals and registrations at multiple stages of operation, each subject to different timelines, laws and authorities.

For example, an MSME with a manufacturing unit and corporate office in the same state may still need about 70 one-time registrations and approvals across four stages: set-up, pre-commissioning, post-commissioning and ongoing operations. These include land allotment, project and construction approvals, labour, safety and health clearances, tax registrations and more. In addition, businesses must meet ongoing compliance requirements throughout the production cycle.

These obligations span both central and state regulations, further expanding the compliance load. As rules multiply, so does the operational challenge of building the capacity to meet them.

A further challenge is the constantly changing regulatory environment. On average, 42 regulatory updates are issued each day across the wider business ecosystem. These come from multiple ministries, departments and regulators and affect enterprises of all sizes. MSMEs are particularly vulnerable, with at least 90% of these changes affecting them directly or indirectly.

In response, many organisations are working to build a stronger compliance culture by involving top management more closely.

Under the Enhanced Ease of Doing Business (EoDB) agenda, the 2026–27 Union Budget highlighted digitised single-window clearances and improved tax compliance to simplify processes and lower administrative costs.

The government has also introduced measures to ease the compliance burden on MSMEs and support growth. These include digitalisation, decriminalising minor offences and simplifying compliance through self-certification under the new labour codes. Key initiatives include the Udyam Registration Portal, third-party audits, fewer board meetings and proposed audit exemptions for smaller firms.

Even so, the regulatory framework still needs serious review and targeted reform if MSMEs are to do more than just survive. Continued dialogue with the government is essential to better understand these challenges and ensure that Ease of Doing Business measures are implemented for MSMEs in both letter and spirit.

-        Sunil Singhi

Managing Partner, V Singhi & Associates