Micro, Small and Medium Enterprises (MSMEs) are vital to economic growth, employment, and industrial diversification. In India, MSMEs contribute about 30 per cent of GDP and provide employment to nearly 30 million people. Despite their scale, Indian MSMEs underperform in productivity, manufacturing value addition, exports, and technology adoption. This contrasts with the European Union (EU), where MSMEs operate in high-cost environments yet contribute 45–70 per cent of GDP and a dominant share of manufacturing output, underscoring the importance of institutional and ecosystem support rather than firm size alone.

This policy note analyses MSME experiences in selected EU countries and draws lessons for strengthening India’s MSME ecosystem, particularly in manufacturing. EU experience shows that MSME success is anchored in coherent ecosystems combining finance, skills, innovation, clusters, standards, and predictable regulation.

Country experiences highlight distinct strengths. Germany’s Mittelstand benefits from patient finance, strong vocational and apprenticeship systems, and export orientation. France demonstrates the value of integrated public platforms that combine finance, innovation, advisory, and export support to help MSMEs scale. Italy shows how dense industrial districts and clusters generate collective efficiency, enabling small firms to compete globally. Other EU economies illustrate the role of MSMEs in supplier development, digitalisation, innovation, and sustainability transitions.

Indian MSMEs, by contrast, face persistent structural constraints. Productivity remains low due to limited technology adoption, skill gaps, informality, and inadequate infrastructure. Access to finance is skewed toward short-term credit, with limited patient capital for scaling and technology upgrading. Regulatory and compliance burdens are fragmented and unpredictable. Most critically, Indian MSMEs remain weakly integrated into domestic and global value chains.

The note distils key lessons for India: MSMEs must be placed at the core of industrial and export policy rather than addressed through fragmented schemes; institutional integration and one-stop delivery systems are essential; cluster and value-chain development can generate collective efficiency; skills and standards should be treated as productive assets; and digitalisation and the green transition should be leveraged as drivers of productivity and competitiveness.

A strategic shift toward a system-based MSME policy framework is essential to unlock higher productivity, deeper value-chain integration, and resilient, inclusive growth in India.