Union Budget 2026-27: A Defining Moment for India’s MSMEs Amid Global Uncertainty

As India approaches the Union Budget 2026, the global economic environment remains fragile and uncertain. Slowing growth in advanced economies, prolonged geopolitical tensions, volatile commodity prices, and recalibrating global supply chains are reshaping the contours of international trade and capital flows. For India’s 63+ million Micro, Small and Medium Enterprises (MSMEs)—the backbone of employment, exports, and grassroots innovation—this Budget represents far more than an annual fiscal exercise. It is a moment of strategic reckoning.

Indian MSMEs contribute ~30% to GDP, over 45% to exports, and employ more than 110 million people, yet they remain disproportionately vulnerable to global shocks, domestic cost pressures, and regulatory complexity. As India positions itself as a trusted global manufacturing and services hub, the Union Budget must decisively strengthen MSMEs to compete, comply, and scale.

This editorial outlines priority concerns, policy gaps, and actionable recommendations from an MSME-first lens.

1. Cost of Capital: The Single Biggest Constraint

Despite multiple credit schemes, access to affordable finance remains the most pressing concern for MSMEs.

Ground Reality

• MSME credit gap estimated at ₹20–25 lakh crore

• Average borrowing cost for small enterprises remains 300–500 basis points higher than large corporates

• Rising global bond yields and tight liquidity conditions continue to elevate domestic lending rates

• Micro enterprises still rely heavily on informal credit

Budget Recommendations

• Expand CGTMSE coverage with higher ticket limits and lower guarantee fees

• Introduce a Permanent Interest Equalisation Framework for MSMEs, not scheme-based extensions

• Incentivise banks to increase cash-flow-based lending using GST, UPI and account aggregator data

• Create a National MSME Risk-Sharing Fund with blended finance participation

2. Export Competitiveness & Global Trade Readiness

Global demand slowdown, compliance-heavy markets, and currency volatility are eroding MSME export margins.

Key Challenges

• MSMEs lack scale to absorb non-tariff barriers, ESG norms, and certification costs

• Limited awareness of FTAs, RoDTEP, trade finance instruments

• Overdependence on US & EU markets

Budget Recommendations

• Enhance export credit guarantee coverage for MSMEs

• Create a National MSME Export Readiness Programme covering:

  • Certifications (ISO, CE, ESG)

  • Market intelligence & buyer discovery

  • Logistics and warehousing support

• Expand interest subvention on pre- and post-shipment credit

• Allocate higher funds for new market access in Africa, Latin America, ASEAN and Middle East

3. Digital & Technology Adoption: From Survival to Scale

India’s digital public infrastructure is globally admired, but MSME adoption remains uneven.

Current Gaps

• Low adoption of AI, cloud, ERP, cybersecurity

• Digital divide between urban clusters and Tier-2/3 MSMEs

• Rising cyber risks without adequate safeguards

Budget Recommendations

• Introduce Digital Transformation Vouchers for MSMEs

• Provide tax credits or direct grants for ERP, cybersecurity, and cloud adoption

• Launch a National MSME Cyber Safety Mission

• Encourage tech vendors to offer India-specific MSME pricing models

4. Delayed Payments & Working Capital Stress

Despite the MSMED Act, delayed payments remain endemic.

Data Points

• Average receivable cycle for MSMEs: 90–120 days

• TReDS adoption remains low among buyers

Budget Recommendations

• Mandatory onboarding of large buyers on TReDS

• Penal interest for chronic defaulters with public disclosure

• Faster MSME payment dispute resolution via digital arbitration

• Strengthen e-marketplace-based invoice discounting

5. Supply Chain Resilience & Import Dependence

Geopolitical disruptions continue to expose vulnerabilities in MSME supply chains.

Concerns

• Dependence on imports for machinery, electronics, specialty chemicals

• Logistics cost still at ~14% of GDP, higher than global peers

Budget Recommendations

• Incentivise local sourcing clusters under Make in India

• MSME-focused incentives under PLI-linked ancillarisation

• Special logistics subsidies for MSMEs in exports and e-commerce

• Promote shared infrastructure in industrial clusters

6. Labour, Skills & Compliance Fatigue

Human capital constraints threaten productivity and competitiveness.

Challenges

• Skill mismatch in manufacturing and services

• Compliance complexity across labour laws, GST, EPFO, ESIC

• Limited capacity to invest in training

Budget Recommendations

• Demand-linked apprenticeship incentives for MSMEs

• Simplify labour compliance with a single digital return

• Credit-linked skill vouchers for MSME employees

• Sector-specific skill councils aligned with MSME clusters

7. ESG, Sustainability & Green Transition

Global buyers increasingly demand sustainability compliance, but MSMEs lack capacity.

Gaps

• High cost of green technology adoption

• Limited access to green finance

• Low awareness of ESG reporting frameworks

Budget Recommendations

• Capital subsidies for energy efficiency, rooftop solar, waste management

• Launch Green MSME Credit Lines with interest subvention

• Free or subsidised energy and ESG audits

• Integrate MSMEs into India’s carbon market framework

8. Policy Predictability & Implementation Confidence

Frequent changes and delayed disbursements weaken trust.

MSME Ask

• Stability over novelty

• Implementation over announcements

Budget Recommendations

• Multi-year visibility for key MSME Schemes

• Real-time dashboards for subsidy disbursements

• Faster grievance redressal mechanisms

• Outcome-based evaluation of schemes

9. Innovation, R&D & MSME Global Branding

India cannot become a global manufacturing leader without MSME-led innovation.

Budget Recommendations

• Introduce Innovation Vouchers for MSMEs

• Co-funded R&D with universities and startups

• Export brand-building grants for MSME global brands

• Strengthen incubators focused on traditional and emerging sectors

Conclusion: From Welfare to Wealth Creation

The Union Budget 2026 has an opportunity to reposition MSMEs from survival entities to strategic growth partners in India’s global economic ambitions. What MSMEs seek is not fragmented support, but a coherent ecosystem—where finance is affordable, compliance is simple, technology is accessible, and global markets are attainable.

A globally competitive India will ultimately be built on the strength of its MSMEs. This Budget must reflect that conviction—clearly, decisively, and sustainably.

TAG: Dr Faiz Askari