What happens when everyone is an entrepreneur, but hardly anyone scales? And what if the real puzzle isn’t scaling at all?
The Numbers That Made Me Pause
While analyzing an listed NBFC servicing MSME sector only, I stumbled on a figure that shook me: India has 63 million registered MSMEs. Add the unregistered ones—the kirana shop owner, the AC repair technician, the home-based caterer—and the number crosses 100 million enterprises.
My first reaction: India is breathtakingly entrepreneurial. Pretty awesome
My second reaction, a few minutes later: But if we have so many businesses, why does the economy still feel fragmented?
That question pushed me down a rabbit hole. It forced me to rethink everything I thought I knew about India’s business ecosystem. I read several articles, watched YouTube videos of Think Tanks, economists, and CEO representing this segment.
The Pyramid Reality
India’s official MSME definitions helped me reframe the picture:
| Category | Investment Limit | Turnover Limit | Typical case |
| Micro | ≤ 1 crore | ≤ 5 crore | Corner shop, local service |
| Small | ≤ 10 crore | ≤ 50 crore | Local Manufacturer |
| Medium | ≤ 50 crore | ≤ 250 crore | Structured Companies |
Here’s the mind boggling fact: 99% are “micro.”
- ~62.4 million micro
- ~0.6 million small
- ~0.03 million medium
It’s a pyramid where almost everyone is stuck at the base.
The Services Surprise
I once pictured MSMEs as small factories. In reality, many are services:
- Electricians, repairers, small contractors
- Local mobile shops, printers, and florists
But here’s the tough part: How do you scale something built almost entirely on personal effort?
India (~70 MSME per 1000 people) has more than twice Germany’s (~31 MSME per 1000 people) business density. But Germany’s enterprises are vastly more productive. So the uncomfortable question arises: Are we celebrating the wrong metric?
Credit or Survival?
The financing gap makes it sharper:
- Micro: only 14–17% access to formal credit
- Small: 38–42%
- Medium: 75–80%
And much of what’s called MSME lending isn’t growth capital—it’s survival credit. A shopkeeper borrows ₹2 lakh for stock, repays, then repeats—to stay afloat. Meanwhile, a growth-ready manufacturer struggles to raise ₹50 lakh for machinery.
Banks, NBFCs, and Informal lenders are funding survival, while starving growth.
Microfinance vs MSME: The Blurred Line
I was curious (and confused) on MSME/Microfinance lending segments:
| Aspect | Micro MSME Lending | Microfinance (MFI) |
|---|---|---|
| Borrower | Registered businesses | Individuals/groups |
| Loan Size | ₹50,000–₹10 lakh | ₹10,000–₹3 lakh |
| Purpose | Business needs | Personal/livelihood |
| Approach | Individual assessment | Group guarantee |
From my vantage point, micro-MSME lending looks like disguised microfinance. Other than business registration, challenges of MFI is still applicable for Micro MSME lending also. It is less “entrepreneurship financing,” more “livelihood patchwork.”
Global Lessons
Most of us look into developed economies for reference. I did some quick research and found other economies show a different playbook:
| Country | Approach | What I Found Interesting |
|---|---|---|
| USA | Focus on “small business” (not micro) | Fewer entities, higher value per entity |
| Germany | Strong medium enterprises | The famous Mittelstand model |
| UK | Digital-first small businesses | High formalization rates |
| France | Balanced small-medium mix | Strong support systems |
The pattern: fewer but stronger firms. I was able to understand the Manish Sabharwal’s perspective. He puts it: India doesn’t lack companies; it lacks formal jobs.
A Mental Model Shift
In India, MSMEs aren’t one market—they’re three worlds:
- Medium – few, structured, scalable
- Small – the missing middle, growth-ready
- Micro – the massive base, often survival-driven
These aren’t just “different sizes.” They’re different types of economic activity altogether.
Pushback That Made Me Think
Howard Marks quoted John Stuart Mill in August 2025 memo: “He who knows only his own side of the case knows little of that.”
So I tested my view against counterpoints:
- Western growth obsession → Maybe many micro firms choose stability and independence
- Employment risk → MSMEs employ 110M+; pushing consolidation is risky in the ground.
- Tech optimism → A digital footprint is not always means digital transformation.
- Credit fixation → Capital helps, but markets and infrastructure matter more.
This left me with the real crux: Am I mistaking constraints for preferences?
Choice vs Constraint
Manish Sabharwal frames it as a choice. He is trying to be nice in the public stage but evidence points to constraints:
- Education → Weak skills/apprenticeships
- Geography → Poor infrastructure, local demand, low mobility
- Social capital → Weak networks, low awareness
Many micro-entrepreneurs aren’t “choosing” smallness—they’re trapped in it.
Reframing Policy
The right question isn’t: “How do we serve micro as they are?” It’s: “How do we expand choices so they aren’t forced to stay micro?” One of the few possible intuitive outcomes could be:
- Skills & training for formal jobs
- Mobility enablers like housing & transport
- Awareness & networks for opportunities
- Safety nets to reduce the risk of scaling
Conclusion: From Easy Narratives to Better Questions
The MSME puzzle isn’t about celebrating 100 million businesses. It’s about asking whether those millions exist by choice or constraint.
Reframed, the focus shifts:
- From counting enterprises → to measuring opportunity
- From disbursing credit → to dismantling barriers
- From romanticizing resilience → to enabling real choice
I don’t claim to have answers. But I now have better questions. And that’s where the journey continues. In follow-ups, I’ll test this puzzle through different lenses—credit vs. growth, jobs vs. enterprises, formal vs. informal—to see whether my mental models hold or break. After all, progress lies not in easy narratives but in building sharper questions that push us closer to the complex truths of economic freedom in India.