MSMEs and the Skill Gap: Why Hiring Remains a Top Challenge

In workshops, tiny studios, and modest factories across India, MSMEs employ over 60 percent of India’s workforce and contribute nearly 29 percent to the nation’s GDP. Yet, even as these businesses shape the Indian economy, their growth is often held back, not by finance, but by a significant shortage of skilled labour.

A recent survey revealed that around 25 percent of MSME owners cite a lack of skilled manpower as a major hurdle, especially in sectors like garments, food processing, and defence equipment manufacturing. In many of these units, on‑the‑job training or informal apprenticeships are the norm, but they rarely meet the technical and soft‑skills standards demanded by modern markets.

This skills deficit isn’t confined to remote or rural areas; it extends to urban corridors too. The industrial belts of Indore, Pithampur, Dewas, and Palda have seen companies trimming production shifts or losing productivity altogether. Shortages of up to 35 percent in unskilled roles and 10–15 percent in technical roles have pushed operational costs up by 5–8 percent in recent months.

Both micro and medium enterprises feel the pinch. Larger units, though just 0.3 percent of all MSMEs, still struggle: about 82 percent of medium enterprises haven’t adopted Industry 4.0 tools, and nearly 88 percent aren't benefiting from any government skill programs. That gap restricts their ability to upscale, innovate, and plug into global supply chains.

Despite strong policy ambitions, implementation lags. NITI Aayog and the Institute for Competitiveness issued a joint report calling for urgent reforms in financing, markets, and skilling to boost MSME competitiveness. The same analysis notes that while credit access has improved modestly, with micro and small enterprises’ formal banking access rising from 14 percent to 20 percent between 2020–2024 (and medium firms from 4 to 9 percent), the skill gap remains stubbornly unaddressed.

Government schemes like the Entrepreneurship and Skill Development Programme (ESDP), the PM Vishwakarma Scheme for artisans, and the National Skill Development Mission are meant to bridge this divide. But awareness and reach remain low. According to a Cushman & Wakefield report, 71 percent of manufacturing MSMEs say they haven’t benefited from government training initiatives. That mismatch between promise and delivery is a frequent refrain.

From Delhi to Tamil Nadu, entrepreneurs share similar frustrations. One garment exporter recounted how employees lack even basic industrial safety training, leading to frequent delays and compliance hitches. Another engineering MSME owner lamented that technicians trained through traditional ITIs struggled with digital systems or precision tools, a stark reflection of misaligned curricula.

But there is movement. Inspired by international models, NITI Aayog’s roadmap for medium enterprises recommends a data‑driven skill mapping platform (MSME Sampark Portal) and tailored modules aligned with sectors and regions. It even references Turkey’s e‑Academy model, offering distance entrepreneurship training with special provisions for women and youth, as a best practice India could emulate.

To scale impact, the recommendation extends beyond classroom training. Experts call for upgrading MSME Technology Centres into India SME 4.0 Competence Centres, where workers can learn AI, IoT, and automation hands‑on. Another suggestion was a centralised sub‑portal within Udyam, an AI‑driven scheme‑discovery engine to connect enterprises with training and tech support.

What about motivation? Recent EY survey findings show that Indian professionals increasingly prioritise skill development as a motivator for job mobility and career growth. That underscores both a demand and an opportunity: MSMEs could benefit by offering upskilling opportunities to attract and retain talent.

Despite the gaps, there are pockets of hope. In the clean energy sector, companies like Tata Power have trained hundreds of thousands of youth in solar installation, battery management, and digital monitoring roles. Yet, the sector as a whole still faces a shortfall of over 1.2 million skilled workers, pointing to a systemic issue, not an isolated one.

In raw human terms, the situation often comes down to trust. A food processing unit owner in Maharashtra shared how, after investing time and funds in training a young operator, the person left soon after for a higher-paying urban job. Without that guarantee of retention, MSMEs prefer informal hires, perpetuating the cycle of limited training and high turnover.

If India hopes to turn MSMEs into engines of inclusive growth and job creation, closing the skill gap must be priority one. It’s about aligning vocational ecosystems to real business needs, ensuring rural and micro-enterprises are not left behind, and making training programs both accessible and aspirational.

The narrative of India’s MSMEs is not just one of survival—it can be one of transformation. When workers are skilled, when training pathways are clear and credible, and when policy meets people at the grassroots, MSMEs can hire not just more, but better, and growth becomes equitable, productive, and sustainable.