While tariffs bring immediate challenges, they also open doors to innovation and capacity building for the MSME sector

Published Date – 4 November 2025, 10:42 PM

By Dr K Srinivasa Rao

Following the US tariff turmoil, the MSME sector is vulnerable and needs strong support. The impact might even affect MSMEs in “sunrise sectors” such as solar photovoltaics (PV)/renewable energy and pharmaceuticals, along with traditional sectors like textiles, gems, and jewellery. To help them recover, given the current state of the sector, some innovative measures are necessary. The tariff impact could be temporary, but restoring MSMEs should be a permanent goal to make them more resilient.

Due to continued policy initiatives and institutional support, MSMEs (Micro, Small and Medium Enterprises) — the backbone of the economy — are working toward reaching their full potential. The sector can support the economy in reaching aspirational growth and contribute to realising the vision of Viksit Bharat 2047, despite the challenges it faces. Some indicators suggest that MSMEs are on a strong recovery path, especially following the pandemic.

Its contribution to gross value added (GVA) steadily increased from 27.3 per cent in 2020-21 to 29.6 per cent in 2023-24. MSME exports grew significantly, climbing from Rs 3.95 lakh crore in 2020-21 to Rs 12.39 lakh crore in 2024-25 (a threefold increase). The most notable rise is in the share of total exports, which reached 45.73 per cent in 2023-24. More than 50 per cent of MSMEs reported a year-on-year sales growth of over 10 per cent from May 2021 to March 2024, showing strong signs of recovery.

Registration of Units

The progress in formalising MSME units has been notable, with a significant rise in registrations on the Udyam portal. This enables the sector to receive targeted government support. The Udyam portal includes another simplified informal category called the ‘Udyam Assist Platform (UAP)’, used by informal micro-enterprises where having a PAN card or GST registration is not mandatory. Of an estimated 6.9 crore MSME units, 4.1 crore are registered with Udyam and 2.8 crore with UAP.

Both types can obtain a registration certificate from Udayam which qualifies them for priority sector lending (PSL) benefits and other microcredit programmes. UAP holders can upgrade their registration to regular Udyam certification once the entrepreneurs meet the requirements. Registered MSMEs are added to the government’s database for enhanced outreach and support.

Challenges

Many MSMEs, particularly micro and small businesses, struggle to access timely and sufficient institutional credit. This is often because they lack collateral, face high interest rates, and encounter strict eligibility requirements from banks and financial institutions. Additionally, many entrepreneurs lack the necessary financial skills and knowledge to effectively plan their finances, maintain proper records, and access formal financial services.

A dedicated ‘MSME Bank’, modelled on a PPP insitution similar to NaBFID, could help scale financing and strengthen the sector’s growth potential

Although the annual growth of credit to the MSME sector reached 14.7 per cent during 2023-24, the credit gap for the industry is estimated to be around 25 lakh crore. Another high-end estimate from a NITI Aayog report states that only about 19 per cent of MSME credit demand was formally met by FY21, leaving approximately Rs 80 lakh crore unmet. There is enough evidence that the sector is starved of credit despite financial inclusion reaching 67 per cent in March 2025. A lack of documented credit history, informal operations, and a high-risk perception by traditional lenders are known reasons for the limited flow of credit to the sector.

Another major limitation is the inability to upgrade technology, machinery, and infrastructure. Many units still utilise outdated equipment, production methods, and management software, resulting in lower productivity and a quality gap compared to their larger domestic or international competitors. They often lack the capacity to innovate, adapt to market shifts, and integrate into global value chains. Resistance or inability to adopt modern digital tools, e-commerce platforms, and advanced ICT (Information and Communication Technology) solutions limits their market reach and operational efficiency.

Even skill development and talent management pose a bigger challenge in a competitive environment. MSMEs may struggle to find opportunities for training and developing their workforce’s skills. Retaining skilled labour and managerial talent is a significant obstacle. MSMEs often cannot compete with the salaries and benefits offered by larger companies. Many remain family-run businesses that usually lack professional management practices, clear organisational structures, and specialisation in key areas such as technology, talent management, risk management, marketing, governance, and compliance.

Opportunities

Tariffs pose a short-term challenge, but they also create opportunities for innovation and capacity building in the sector. This can lead to greater long-term sustainability, including a broader role in guiding the economy and simultaneously increasing job opportunities. In addition to quickly providing additional loans under the existing MUDRA (Micro Units Development & Refinance Agency Ltd) schemes, the newly introduced PM Vishwakarma loan scheme, which offers collateral-free loans, banks should find value in providing loans under their own lending schemes tailored for the sector.

Additionally, banks should be encouraged to collaborate more effectively with government agencies and lead banks in districts to expand lending through the Prime Minister’s Employment Generation Programme and the Credit-Linked Capital Subsidy Scheme for Technology Upgradation. Similarly, schemes from the Small Industries Development Bank of India (SIDBI) could be considered, while also leveraging the potential of the Credit Guarantee Fund Trust for Micro and Small Enterprises.

A New MSME Bank

The government can expedite a comprehensive support package for MSMEs, especially those in labour-intensive sectors such as textiles, apparel, gems & jewellery, leather, engineering goods, and agri-marine exports, which are likely to be severely impacted by the US tariff imposition.

The government could also consider establishing an ‘MSME Bank’ — a specialised financing institution dedicated solely to MSME entrepreneurs, modelled after a development bank funded through public-private partnership, similar to the National Bank for Financing Infrastructure and Development (NaBFID). It can be developed with a plan to close the credit gap in the MSME sector over the next 10 years. Utilising highly skilled manpower and cutting-edge technology on a large scale can help accelerate credit flow to the industry. Any routine nominal support may have only a limited impact. Amid the emerging geopolitical risks, growth plans envisioned under Viksit Bharat will necessitate a game-changing strategy.

A notably different, simplified credit appraisal and risk management process needs to be integrated to ensure a tailored credit delivery and recovery system. MSME organisations, such as the All India MSME Association (AIMA MSME), the Indian Industries Association (IIA), and the Engineering Export Promotion Council (EEPC), should develop a collaborative, constructive, and advisory framework to revamp the sector. This challenge should be used as an opportunity to empower MSMEs with enough capacity to support the economy and potentially create jobs.

(The author is Adjunct Professor, Institute of Insurance and Risk Management – IIRM, Hyderabad. Views are his own)