Rs 8.1 lakh crore stuck in dues: MSME growth hinges on dispute reform, warns new White Paper
With over 7.16 crore registered enterprises employing more than 31 crore people, the MSME sector remains central to growth and jobs
- Feb 27, 2026,
- Updated Feb 27, 2026 12:44 PM IST
India's micro, small and medium enterprises sit at the heart of the economy, but a new White Paper argues that their future credibility will depend not just on market access or statutory protection, but on fixing how disputes are resolved.
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With over 7.16 crore registered enterprises employing more than 31 crore people, the MSME sector remains central to growth and jobs. Yet financial stress is mounting. An estimated Rs 8.1 lakh crore remains locked in delayed payments, tightening working capital, disrupting cash flows and restricting investment.
Women's participation in the sector is also rising. More than 1.17 crore women-owned MSMEs are registered on the Udyam platform. But dispute resolution challenges, particularly around delayed payments, are said to disproportionately affect smaller and women-led enterprises.
The White Paper, prepared by the Women's Collective Forum in collaboration with National Law University, examines the intersection of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and the Arbitration and Conciliation Act, 1996 (A&C Act), through what it describes as a systemic and gender-responsive lens.
The study draws on legal scholars, practitioners, industry stakeholders and technology platforms to identify legal ambiguities, procedural delays and institutional gaps that weaken enforcement.
The paper devotes significant attention to how courts have shaped the uneasy balance between the MSMED Act and the Arbitration and Conciliation Act - often strengthening statutory protection for small firms while unsettling contractual predictability.
It notes that in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. and Silpi Industries v. Kerala State Road Transport Corporation, the Supreme Court made clear that once an MSME supplier invokes the statute, its protections prevail over private arbitration clauses. As the paper puts it, "Judicial decisions such as Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. and Silpi Industries v. Kerala State Road Transport Corporation establish that the MSMED Act overrides private arbitration agreements once invoked by an MSME supplier, privileging statutory protection over party autonomy."
That shift, the authors argue, comes with trade-offs. The same protection that empowers smaller enterprises can blur expectations around where and how disputes are to be resolved. "While this strengthens MSME safeguards, it undermines contractual certainty, particularly regarding seat selection, interim relief, limitation, and the enforceability of negotiated dispute clauses. Conflicting rulings on registration requirements and the applicability of statutory interest further exacerbate uncertainty."
Beyond judicial interpretation, the report points to design flaws in the framework itself. Timelines intended to expedite resolution are treated as flexible; liquidity pressures are intensified by procedural requirements; and enforcement is sometimes weakened by overreach.
In the paper's words, "The framework’s structural inefficiencies are evident: the 90-day timeline is treated as directory, interim relief under Section 9, A&C Act operates paradoxically, the 75% pre-deposit requirement under Section 19, MSMED Act strains liquidity and fuels writ litigation, and Facilitation Councils have occasionally exceeded statutory limits, affecting enforceability and finality."
Another Supreme Court ruling — Sonali Power Equipements Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board — clarified how limitation periods apply, but the paper suggests it also opened a strategic window. "The Supreme Court's...creates strategic room for revival of stale claims at the conciliation stage."
The authors acknowledge that reform efforts are underway, including the Mediation Act, 2023 and the rollout of AI-enabled online dispute resolution systems drawing on UNCITRAL standards. Yet they warn that technological fixes alone cannot resolve deeper statutory ambiguities. "However, unless legislative ambiguities are resolved and institutional capacity strengthened, the MSMED dispute resolution regime risks weakening both MSME protection and commercial predictability, undermining the ease-of-doing-business objectives it was designed to advance."
To restore confidence, the paper calls for clearer legislative drafting and stronger institutional discipline. It recommends targeted changes to jurisdictional clarity, registration norms, interim relief, consolidation mechanisms, and the 75% pre-deposit requirement.
As it states, "Legislative clarification on jurisdiction, registration, interim relief, consolidation, and the 75% pre-deposit requirement, coupled with stricter timeline enforcement, digital case management, professionalised Facilitation Councils, and calibrated judicial restraint, is essential to restore certainty and arbitral finality."
The stakes, the authors argue, extend beyond domestic litigation. As Indian MSMEs become more deeply embedded in global supply chains and Free Trade Agreements, dispute resolution is no longer a technical legal matter but a question of competitiveness.
"As MSMEs increasingly integrate into global trade architectures, including emerging commitments in India's Free Trade Agreements with leading global economies, a stable and efficient domestic dispute framework becomes integral to export competitiveness, investor confidence, and inclusive growth."
The report ultimately frames dispute reform as central to the credibility of India's economic strategy. "The long-term credibility of India’s MSME growth strategy will ultimately depend on aligning dispute resolution reform with trade integration and gender-responsive policy design, thereby transforming MSMEs into globally competitive and institutionally supported engines of economic resilience."
India's micro, small and medium enterprises sit at the heart of the economy, but a new White Paper argues that their future credibility will depend not just on market access or statutory protection, but on fixing how disputes are resolved.
Also watch: Big Relief For Flyers! Air tickets now cancellable within 48 hours without penalty
With over 7.16 crore registered enterprises employing more than 31 crore people, the MSME sector remains central to growth and jobs. Yet financial stress is mounting. An estimated Rs 8.1 lakh crore remains locked in delayed payments, tightening working capital, disrupting cash flows and restricting investment.
Women's participation in the sector is also rising. More than 1.17 crore women-owned MSMEs are registered on the Udyam platform. But dispute resolution challenges, particularly around delayed payments, are said to disproportionately affect smaller and women-led enterprises.
The White Paper, prepared by the Women's Collective Forum in collaboration with National Law University, examines the intersection of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and the Arbitration and Conciliation Act, 1996 (A&C Act), through what it describes as a systemic and gender-responsive lens.
The study draws on legal scholars, practitioners, industry stakeholders and technology platforms to identify legal ambiguities, procedural delays and institutional gaps that weaken enforcement.
The paper devotes significant attention to how courts have shaped the uneasy balance between the MSMED Act and the Arbitration and Conciliation Act - often strengthening statutory protection for small firms while unsettling contractual predictability.
It notes that in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. and Silpi Industries v. Kerala State Road Transport Corporation, the Supreme Court made clear that once an MSME supplier invokes the statute, its protections prevail over private arbitration clauses. As the paper puts it, "Judicial decisions such as Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. and Silpi Industries v. Kerala State Road Transport Corporation establish that the MSMED Act overrides private arbitration agreements once invoked by an MSME supplier, privileging statutory protection over party autonomy."
That shift, the authors argue, comes with trade-offs. The same protection that empowers smaller enterprises can blur expectations around where and how disputes are to be resolved. "While this strengthens MSME safeguards, it undermines contractual certainty, particularly regarding seat selection, interim relief, limitation, and the enforceability of negotiated dispute clauses. Conflicting rulings on registration requirements and the applicability of statutory interest further exacerbate uncertainty."
Beyond judicial interpretation, the report points to design flaws in the framework itself. Timelines intended to expedite resolution are treated as flexible; liquidity pressures are intensified by procedural requirements; and enforcement is sometimes weakened by overreach.
In the paper's words, "The framework’s structural inefficiencies are evident: the 90-day timeline is treated as directory, interim relief under Section 9, A&C Act operates paradoxically, the 75% pre-deposit requirement under Section 19, MSMED Act strains liquidity and fuels writ litigation, and Facilitation Councils have occasionally exceeded statutory limits, affecting enforceability and finality."
Another Supreme Court ruling — Sonali Power Equipements Pvt. Ltd. v. Chairman, Maharashtra State Electricity Board — clarified how limitation periods apply, but the paper suggests it also opened a strategic window. "The Supreme Court's...creates strategic room for revival of stale claims at the conciliation stage."
The authors acknowledge that reform efforts are underway, including the Mediation Act, 2023 and the rollout of AI-enabled online dispute resolution systems drawing on UNCITRAL standards. Yet they warn that technological fixes alone cannot resolve deeper statutory ambiguities. "However, unless legislative ambiguities are resolved and institutional capacity strengthened, the MSMED dispute resolution regime risks weakening both MSME protection and commercial predictability, undermining the ease-of-doing-business objectives it was designed to advance."
To restore confidence, the paper calls for clearer legislative drafting and stronger institutional discipline. It recommends targeted changes to jurisdictional clarity, registration norms, interim relief, consolidation mechanisms, and the 75% pre-deposit requirement.
As it states, "Legislative clarification on jurisdiction, registration, interim relief, consolidation, and the 75% pre-deposit requirement, coupled with stricter timeline enforcement, digital case management, professionalised Facilitation Councils, and calibrated judicial restraint, is essential to restore certainty and arbitral finality."
The stakes, the authors argue, extend beyond domestic litigation. As Indian MSMEs become more deeply embedded in global supply chains and Free Trade Agreements, dispute resolution is no longer a technical legal matter but a question of competitiveness.
"As MSMEs increasingly integrate into global trade architectures, including emerging commitments in India's Free Trade Agreements with leading global economies, a stable and efficient domestic dispute framework becomes integral to export competitiveness, investor confidence, and inclusive growth."
The report ultimately frames dispute reform as central to the credibility of India's economic strategy. "The long-term credibility of India’s MSME growth strategy will ultimately depend on aligning dispute resolution reform with trade integration and gender-responsive policy design, thereby transforming MSMEs into globally competitive and institutionally supported engines of economic resilience."