The MSMED amendment and a new compact with India’s entrepreneurs

India’s economic reforms have traditionally been judged by how effectively they reduced the cost of doing business. Liberalisation dismantled licensing barriers, GST integrated the domestic market, and the Insolvency and Bankruptcy Code strengthened credit discipline. Digital Public Infrastructure transformed payments and public service delivery. Collectively, these reforms made it easier to start, operate and expand a business.

The next generation of reforms must pursue a different objective. It must reduce the cost of uncertainty. Delayed payments, contractual disputes and unpredictable enforcement discourage investment. Businesses invest when they believe institutions will protect the value they create.

It is against this backdrop that the Micro, Small and Medium Enterprises Development (Amendment) Act, 2026 deserves attention. Its significance extends beyond legal provisions to the commercial trust on which enterprises depend.

For much of the past two decades, India’s MSME policy has concentrated on expanding access to finance. Yet this approach has often overlooked a more fundamental question: Why should an entrepreneur need to borrow simply because someone else has failed to pay?

Every month that an invoice remains unpaid transfers working capital from the supplier to the buyer. The smaller the supplier, the greater the economic burden. Industry estimates suggest ₹10–15 lakh crore of MSME receivables may be locked in delayed payments, depriving businesses of capital for production, innovation, exports and employment. Payment uncertainty also discourages entrepreneurs from accepting larger orders or investing in new capacity.

The original Act already recognised the principle of timely payment. The Amendment seeks to make that right enforceable within a commercially relevant timeframe. Through structured timelines for mediation and arbitration, Online Dispute Resolution, stronger enforcement and recovery mechanisms, and support for the Trade Receivables Discounting System (TReDS), it aims to change payment behaviour.

Why TReDS matters

TReDS is particularly important. Rather than requiring businesses to borrow against unpaid dues, it allows accepted invoices to be discounted for working capital. Invoice discounting through TReDS has grown from approximately ₹40,000 crore in 2021–22 to ₹3.47 lakh crore in 2025–26, with cumulative liquidity crossing ₹7 lakh crore. Its reach, however, remains limited relative to India’s B2B receivables market.

These reforms also matter to India’s ambitions in manufacturing, supply chain diversification and long-term investment. Global investors increasingly assess how reliably contracts are enforced and disputes resolved. The UK, European Union and Australia have each adopted measures to improve payment discipline. India’s Amendment reflects the same recognition that fair payment practices strengthen supply chains.

The past decade has been defined by formalisation. Through Udyam Registration, Udyam Assist, GST and digital payments, India has brought millions of enterprises into the formal economy. Today, more than 9.08 crore enterprises are registered through the Udyam Registration and Udyam Assist platforms, together reporting employment of over 40.2 crore people. Yet 9.02 crore remain micro enterprises, around 5.4 lakh are small and fewer than 42,000 qualify as medium enterprises.

India’s challenge is no longer simply to create more enterprises. It is to help existing enterprises grow. The Amendment lays the institutional foundation for MSME Reform 2.0. The first phase was about formalisation. The second must be about graduation. Predictable cash flows can help businesses invest in technology, skilled workers, quality and exports. Policy must also encourage cash-flow-based lending, drawing on digital transactions, GST records and payment histories, while supporting enterprises as they grow.

None of this diminishes the importance of implementation. Facilitation Councils must become faster and more effective. Online Dispute Resolution must become trusted and accessible. TReDS adoption must expand. Public and private buyers must treat prompt payment as a responsibility, not simply a legal requirement.

Economic reforms are remembered not for the clauses they amend, but for the behaviour they change. The lasting contribution of the MSMED (Amendment) Act could be to change India's culture of commercial payments.

India's first generation of reforms focused on improving the Ease of Doing Business. The next generation must focus on the Predictability of Doing Business. This is the New Compact between the State and its entrepreneurs: fair markets, credible institutions and predictable commercial outcomes.

For those of us who have spent more than a decade advocating stronger payment discipline, the Amendment is an important milestone, but implementation will determine its legacy. If carried through effectively, it could establish that commercial trust is economic infrastructure, as essential to India's development as roads, ports, digital networks and financial capital.

(The author is President of India SME Forum. Views are personal.)