MSMEs Power India's Economic Engine with 30% GDP Contribution
India's micro, small and medium enterprises have made a remarkable comeback. They now contribute nearly 30% to the country's GDP in FY25. This marks a significant rise from the post-Covid low of 27.3% recorded in FY21. The sector's resurgence stems from multiple positive developments.
Export Performance Soars and Credit Penetration Expands
Export figures tell an impressive story. MSME exports have tripled over the past five financial years. They now stand at ₹12 lakh crore. This accounts for 46% of India's total exports. These findings come from the fourth edition of the MSME Sampark Report. Ugro Capital prepared this report in collaboration with Dun & Bradstreet.
Credit growth has kept pace with this expansion. Outstanding MSME credit reached ₹40 lakh crore as of August 2025. This amount is nearly 2.5 times higher than it was five years ago. Micro and small enterprises still dominate borrowing. They account for 71% of MSME credit. However, their share has moderated from 79% in FY20. This shift reflects the rising presence of medium enterprises. Their share has increased to 29% from 21%.
Asset Quality Improves and Formalisation Accelerates
Financial health across the sector shows encouraging signs. MSME non-performing assets declined to ₹80,749 crore in FY25. This is down from ₹1.1 lakh crore in FY21. Micro enterprises still account for a majority of NPAs at 65%. Yet, stress levels have eased across all segments.
NPAs fell by 3% for micro units. They dropped 28% for small enterprises and 30% for medium enterprises. Targeted government support and restructuring measures aided this improvement. This trend points to a gradual strengthening of financial resilience.
Formalisation has also gained momentum. Registrations under the UDYAM portal rose to 6.8 crore MSMEs by September 2025. This marks an 18% increase since February 2025. Credit growth to micro and small enterprises expanded 12% year-on-year. This pace outpaced both medium enterprises and overall system credit growth. It highlights sustained lending appetite at the grassroots level.
Operating Pressures and Debt Dynamics
Despite the progress, operating pressures are building. Working capital cycles have lengthened across several manufacturing segments. Higher inventory holding and slower turnover are the main causes. In sectors like automobiles, chemicals, and electricals, net working capital cycles now range between 63 and 103 days. This increases liquidity strain for smaller firms.
Increased imports of low-cost Chinese goods have also created challenges. Weak global demand has affected revenue margins. Micro enterprises in auto components, electrical equipment, and chemical sectors feel this pressure particularly.
On the debt front, the total small business credit portfolio expanded to ₹45 lakh crore as of June 2025. It grew 19.2% year-on-year. This signals robust demand and rising lender confidence. Sole proprietors with entity presence accounted for 45.9% of MSME credit. Individual proprietors held 31.8%. Enterprise borrowers recorded the lowest delinquency levels. They also showed the highest credit growth of 24.7%. This reflects better scale and financial discipline.
Profitability Indicators and External Risks
Profitability indicators present a mixed picture. Interest coverage ratios remained healthy in several MSME-heavy sectors. Automobiles and education are notable examples. Service-oriented segments like healthcare and hospitality showed improvement. However, debt service coverage ratios remained below 1x for most sectors. This points to ongoing challenges in servicing debt. Elevated interest rates and continued capital expenditure requirements contribute to this situation.
The sector now faces rising external risks. Proposed and existing US tariff measures could impact export-oriented MSMEs. Textiles, gems and jewellery, auto components, and agri-marine products are vulnerable sectors. Sustaining credit growth and balance-sheet stability will require sharper risk assessment. Export market diversification and closer financial monitoring by lenders are also essential.
The outlook for FY26 remains cautiously optimistic. The MSME sector has demonstrated remarkable resilience. It continues to be a vital pillar of India's economic growth story.
