In a strategic policy pivot, the revised MSME definition, which Finance Minister Nirmala Sitharaman announced in this year’s budget, came into effect on April 1, 2025. The revised definition, expanding the investment and turnover criteria since the last revision in 2020 during the Covid period, has been aimed at aligning MSMEs in response to the volatile economic environment marked by inflation, erratic input costs, and intensifying competition in global trade. While the reclassification is seen as a trigger for business expansion and greater formalisation, its implications —both positive and otherwise — warrant more nuanced assessment.
What changed?
Before diving deep, it is important to understand that most of the schemes offered by the government are categorically focused on micro and small enterprises (MSEs). For instance, credit guarantee scheme for collateral-free loan, Prime Minister Employment Generation Programme (PMEGP), Public Procurement Policy, Mudra loan, Trade Enablement and Marketing Scheme, MSE Cluster Development Programme, Procurement and Marketing Support Scheme, etc., excludes medium enterprises.
In contrast, priority sector lending, RAMP (Raising and Accelerating MSME Performance), ZED certification, TReDS, Self-Reliant India (SRI) Fund, etc., are schemes applicable for medium enterprises as well.
From the 2020 revision in MSME definition, which capped investment in micro enterprises at Rs 1 crore and turnover at Rs 5 crore; Rs 10 crore investment and Rs 50 crore turnover in small enterprises; and Rs 50 crore investment and Rs 250 crore turnover in medium enterprises, the latest policy change reflects a significant expansion.
The investment and turnover limits for micro units are now Rs 2.5 crore and Rs 10 crore, Rs 25 crore and Rs 100 crore for small enterprises, and Rs 125 crore and Rs 500 crore for medium enterprises, respectively.
Progressive shift
Raising the turnover cap across micro, small and medium categories has effectively doubled the scope of firms eligible for the MSME status. The move recognised the present-day capital and turnover requirements of particularly micro and small enterprises as medium-sized businesses are relatively better capitalised and have improved access to resources.
With better access to formal credit, incentives for technology upgradation, and market linkages, more businesses, hence, would be able to allocate additional resources towards automation, research, and operational efficiency without risk of losing their MSME status, which was a key deterrent under the previous limits.
On the other hand, for medium enterprises, increasing the turnover cap to Rs 500 crore has acknowledged their role in high-value exports, contract manufacturing, and technical services, given that these firms often serve as key links in global supply chains.
Further, there could be an employment multiplier effect due to the revised definition, as medium enterprises contribute significantly to employment generation relative to their capital size.
“These are steps in the right direction. We must give impetus to enterprises who are striving to grow bigger but were unable to access additional resources, including micro enterprises who want to become smaller and then a medium enterprise,” Sandeep Jain, President, FISME told FE Online.
The revision in turnover criteria is also expected to ensure businesses retain their MSME status despite the rise in their raw material or input costs. When raw materials such as steel, cotton or chemicals see a jump in cost, companies often pass on the cost to customers, which leads to a higher invoice value per unit sold. Consequently, the turnover of a company increases even if sales volume remains flat or declines.
Hence, this leads to companies crossing the MSME threshold on paper without actual growth in business and therefore cease to be the beneficiaries of various MSME schemes by the government.
“Raw material costs in the past five-six years have increased and consequently the turnover of businesses has increased along with labour costs and overheads which put them out of the MSME definition. With the change in definition, MSMEs will be able to grow without losing benefits available to them,” Neeraj Singhal, President at MSME body Indian Industries Association (IIA) told FE Online.
Doubling the turnover limit may also discourage promoters and founders from setting up multiple micro and small units of let’s say up to Rs 50 crore turnover each to remain in MSME fold and instead build a single enterprise of up to Rs 100 crore turnover to continue enjoy the benefits available to a micro and small enterprise.
“Setting up multiple enterprises means more rules and compliance for each enterprise in comparison to building a single enterprise with different subsidiaries with lesser compliance. However, red tapism still exists,” said Singhal from IIA, which has more than 13,500 MSME members.
Similarly, increasing the threshold for investment in plant and machinery in the revised definition to be eligible for MSME status allows businesses to raise funding and make investments without risking their MSME status.
Uneven playing field?
While there are benefits of the reclassification, the decision also has some caveats. For instance, bringing in more businesses under the MSME definition may result in a slightly skewed resource allocation. This means that government procurement schemes, credit guarantee schemes, subsidies, and grants could see an uneven playing field modestly favouring relatively better established and well-resourced small enterprises, which were earlier mid-sized companies, unintentionally sidelining micro and small enterprises.
This may eventually undermine the scheme’s core objective to uplift micro and small enterprises with enhanced credit and other support measures.
Moreover, the absence of tiered sub-categories within the micro and small enterprise segment blurs the contrast between companies operating at different sizes of operation.
For example, a company with a turnover of Rs 11 crore and another at Rs 100 crore are now considered small enterprises even as both operate at vastly different scales with a huge contrast in their ability to secure capital and resources. This risks obstructing precise policymaking for nano or very small businesses.
While the reclassification of the MSME definition reflects a progressive policy shift, it may also bring a nuanced set of challenges. Hence, the allocation of benefits likely requires careful oversight to ensure nano, micro, and small enterprises are prime beneficiaries. If not finely tuned, the change in definition may create a rift in the MSME sector rather than fostering cohesion.