Beyond Incentives: Why India’s MSMEs Need Stronger Ecosystems?

By Dr. Nilanjan Banik

The protesters at Jantar Mantar, whose protest is now over for the time being, had good reason to be angry. The NEET paper leaks are one symptom; the deeper problem is youth unemployment. Young and educated Indians account for a significant share of the unemployed, while underemployment remains widespread. At a time when AI-driven disruption is threatening existing jobs, the government must find ways to create new ones.

The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026, recently placed in the Parliament, could help. The MSME sector employs more than 320 million people, making it the country’s second-largest employer after agriculture, and offers a potential outlet for frustrated young Indians.

India’s 63 million MSMEs are the backbone of its industrial economy. The Economic Survey 2025–26 shows they account for approximately 31% of GDP, 35% of manufacturing output and 49% of exports. Yet India’s MSME base remains largely informal, fragmented and concentrated in low-value activities.

Although the Bill addresses delayed payments, dispute resolution and some compliance burdens, smaller firms continue to struggle with access to affordable credit and compliance with GST, labour, environmental and tax regulations. India could learn from China and the United States, both of which nurtured networks of smaller enterprises as they developed into manufacturing powerhouses.

The US and China did not build dominant industrial economies one firm at a time. They built clusters: specialised ecosystems in which suppliers, skilled labour, capital and applied research operate in close proximity. Three examples illustrate this. North Carolina’s Research Triangle saw Duke, UNC Chapel Hill and NC State anchor biotechnology and pharma clusters from the 1980s, letting university research feed a commercial ecosystem. In Guangdong, China, electronics-focused zones such as Shenzhen combined tax incentives, land and infrastructure to create dense supplier networks—a hardware entrepreneur can design, fabricate and prototype a component there within days. And China’s “Little Giant” programme identifies firms leading in narrow technical niches and fast-tracks their growth through financing, tax incentives and R&D support.

Knowledge spillovers: When competing and complementary firms cluster together, technical knowledge circulates faster than through formal channels—via technicians changing jobs, informal conversations between suppliers and customers, and shared service providers. This tacit learning is hard to transmit across distance.

Talent attraction and retention: A single firm in an isolated location struggles to attract specialised talent, since taking a job there means betting on one employer. A cluster of 20 firms turns the same location into a labour market. Clusters become self-reinforcing: more firms attract more skilled workers, who attract more firms. Isolated MSMEs cannot create this virtuous cycle alone.

Shared infrastructure and lower fixed costs: Testing laboratories, effluent-treatment plants, cold-storage facilities, design centres and logistics hubs all carry high fixed costs that a single small firm cannot justify alone, but become affordable when spread across hundreds of co-located enterprises. This may be the most direct route to competitiveness for India’s MSMEs, most of which are too small to individually afford the quality certification, R&D facilities and export logistics global markets demand.

India already has cluster-oriented initiatives—the Micro and Small Enterprises Cluster Development Programme, PM MITRA textile parks, various common facility centres—but many remain closer to infrastructure grants than genuine ecosystem-building. Four shifts could change this.

Move from generic industrial estates to specialised clusters. Many state industrial parks house an unrelated mix of businesses with little reason to interact. India should instead concentrate resources on fewer, deeper, specialised clusters—auto components in Pune, pharmaceuticals in Hyderabad, electronics in Sriperumbudur—each with shared testing labs, common design centres and supplier directories.

Create an Indian equivalent of the Little Giant programme. Rather than treating every MSME alike, India could identify “hidden champions” already excelling in narrow technical fields such as precision castings, speciality chemicals or defence components, and give them dedicated credit lines, faster patent processing, R&D support and priority procurement access. The production-linked incentive scheme has followed this logic for large-scale electronics and pharmaceuticals; a lighter-touch version could extend it downstream to specialised MSMEs.

Address the financing gap at the cluster level. The RBI estimates the MSME credit gap runs into trillions of rupees, yet lending decisions are still made firm by firm. Cluster-based lending—assessing risk via a cluster’s collective track record, buyer-supplier relationships and shared collateral pools—reduces the information asymmetry of evaluating small firms in isolation. Tirupur’s textile cluster is a well-studied example; it should be scaled through SIDBI and cluster-focused NBFCs.

Put universities at the centre. The starkest difference between Indian clusters and their US or Chinese counterparts is the near-total absence of universities from the industrial ecosystem. Universities aren’t just downstream beneficiaries placing graduates in jobs—they are foundational suppliers of talent, applied research, lab infrastructure and commercial innovation. In China, leading engineering institutes sit near industrial clusters and are explicitly tasked with supplying skilled workers and applied research to local firms. In India, top universities largely operate in silos, and their graduates gravitate to corporate jobs in metros rather than nearby MSMEs. (IPA Service)

(The author is Professor and Co-Founders, Economic Policy Centre, Mahindra University).