Today's MSMEs have their roots in local-level business activities in

villages and also in ancient urban centers. Ancient India was

experiencing sustained growth in these activities, even during the phase
of a lot of political upheaval across the subcontinent. These businesses
and enterprises were instrumental in fulfilling the local needs of the
population. These enterprises also contributed significantly to the
exports of goods to other countries, which resulted in great economic
wealth for the country. These activities considerably declined during
British rule, as significantly cheap products flooded the Indian market.

We can understand the history and evolution of MSMEs in India through

three separate time periods. These time periods are "pre-British rule",
"pre-independence", and "post-independence".

The pre-British period of the Indian economy was primarily agrarian. A

vast part of the subcontinent had villages that were self-sufficient to a
certain extent. Village-level artisans were able to provide for local needs.
They had limited market access due to geographic factors during that
period. However, urban centers (places of pilgrimage, administrative
places, and trade towns) had a high level of economic activities, including
the production of various goods. They primarily met the needs of the
local market. However, a significant portion of this production is
exported. Local producers were producing textiles, utility-oriented
handicrafts, silk cloths, muslin, shawls, carpets, wooden works, artistic
glass works, and colored glass works. Apart from these, ornaments made
in India, jewelry, brass-works, ivory work, and several other notable
products gained prominence and achieved significant admiration across
the world. The political landscape was largely supportive; however, as
political uncertainty and fragmentation increased, these activities also
faced some difficult times. Despite this, they have remained relevant and
growing.
The Mughal Empire started declining and the political prominence of the
East India Company (EIC) grew. British rule started taking shape, and
during the same time, the industrial revolution in Europe and America
attained great heights. Therefore, new manufacturing processes were
implemented in these areas for the mass production of goods. This mass
production required raw materials and market access for finished goods.
The EIC was well aware of this opportunity and used its prominence to
exploit the Indian subcontinent for both purposes. During this period,
raw materials became more dominant than finished goods for export. As
mass-produced goods flooded the Indian market, locally produced goods
and their manufacturers started to lose their business. This leads to the
systemic destruction of local manufacturing as they lose both local and
foreign markets. This effect was primarily visible in urban centers and
trading towns. Village-level artisans also started facing heat; however,
they were slightly less affected by this destruction. This leads to bad
shapes for all industries in India. As British rule transitioned from the
EIC to the British monarchy, the industrialization of India also brought
mass production units in the country, which further aggravated the
situation of local manufacturers. This period was not good for local
industries and became a victim of unfair market situations. This
consequently leads to the destruction of any future growth or
evolutionary prospects of these industries.

Post-independence, the political landscape changed, as did the business

environment. Political leadership took the route of a planned but mixed
economy, under the guidance of socialist ideals. The importance of these
enterprises was well underscored, which led to a slightly favorable
outlook for these entities. The seeds of the transformation were sown
during the pre-independence transition phase, as Khadi became a
symbol of self-reliance and political change. During this time for the first
time, a Khadi production center was established and it was managed by
“All India Khadi Department” which was established in 1922. Taking cue
from its symbolic spark, the following year in 1923, it was replaced by
the All India Khadi Board to create its wider outreach. To make it
inclusive and spinner-driven, this board was replaced by the All India
Spinners Association in 1925. As Khadi witnessed some organizational
activities in the pre-independence phase, the “National Planning
Committee” was established in 1938 by the Indian National Congress.
This committee was responsible for providing formal identification to
“Small Scale and Cottage Industries.” These industries were also known
as “Village and Small Industries” In the year 1947 an “Industrial
Conference” was organized by central government which further
segmented “Village and Small Industries” (VSI) into three categories.
These categories were Service enterprises, Manufacturing and, Auxiliary
Enterprises. (Auxiliaries supported the large units. Service enterprises
provide intangible services. Manufacturing enterprises procure raw
materials and process them into finished goods). The 1947 industrial
conference was a critical event for the formal identification of cottage
industries. As per the recommendations of this conference, a separate
“Cottage Industries Board” was set up in 1948. In the same year, on April
30, 1948, the Government of India passed the “Industrial Policy
Resolution” (IPR 1948), which aimed to control and regulate the
industrial sector in India. It categorizes industries into four major
groups. This policy also underscored the need for the development of
“Small and Cottage Industries.” It was implemented under The
Industries' (Development and Regulation) Act of 1951. Going forward
GOI adopted the five-year planning mechanism, and consequential to it
“All India Khadi and Village Industries Board” was established in 1953. It
was later replaced by the “Khadi and Village Industries Commission”
(KVIC) in 1956. In the same manner, small industries, which were a
critical piece in IPR 1948, were given due credit to ensure their future
growth. The GOI established the “Small Scale Industries Board” (SSIB) in
1955. The SSIB provided a formal definition of small-scale industries in
India. This definition used power consumption, number of employees,
and quantum of capital as defining factors. This definition has undergone
several changes over the course of history. In 1977, a new class of small
industries was identified, named as “Tiny Industries.” This was done to
address the needs of entrepreneurs who run very small enterprises and
primarily cater to local markets. The definition of tiny industries has also
undergone several changes as a need arises.

Today’s MSME originated from the local needs of the village and trade
centers of that time. They also witnessed a great cycle of growth and
recognition. Going forward, systemic destruction was also witnessed in
the British era. Later, as political and geographical landscapes
transformed, these units also began witnessing a much more favorable
market scenario. The government began to focus on the systematic
development of these units. Various national- and state-level policies,
rules, and regulations have emerged. The Indian government created the
Ministry of Small-Scale Industries and Agro and Rural Industries (SSI and
ARI) in October 1999. The core objective of this ministry was to create a
more conducive environment for MSMEs. Later, as industries grew, this
ministry was split into two separate ministries in September 2001: the
Ministry of Small Scale Industries (SSI) and the Ministry of Agro and
Rural Industries (ARI). In the year 2006 MSME Act was passed, next year
both ministries merged into a single ministry that is “Ministry of Micro,
Small and Medium Enterprises” on 9th May 2007.

The evolution of these enterprises during these three phases has laid the
groundwork for today’s MSME structural makeup. These distinct events
shape today’s MSME market. The Indian MSME sector is yet to realize its
full potential to reduce poverty and unemployment in India.