MSME at a cross roads? The way forward

The Union Budget has placed MSMEs (Micro, Small, and Medium Enterprises) firmly in focus, yet industry voices expressed a mix of cautious optimism and pointed criticism regarding its impact on the sector. A former senior office bearer of the SME Chamber of India expressed disappointment with the budget's provisions for MSMEs. He noted that the allocation of only Rs 12,000 crore for fund-based support fell short of expectations, particularly for micro and tiny industries that desperately need value addition, incentives, and a true level playing field.

Drawing from his inputs provided to the Finance Minister prior to the budget, he emphasized the challenges of expanding manufacturing in tier-2 and tier-3 cities, where high-cost financing from banks remains a major barrier. Despite the sector's vital contributions to industrial growth, employment generation and exports, he argued that the budget lacks sufficient incentives and support services to propel MSMEs toward India's ambitious Viksit Bharat goals. An expert in SME credit and financing acknowledged the frustration while providing a broader view of the credit landscape.

He pointed out that around 75 million MSMEs are registered under UDYAM portal pf central government, with the vast majority being micro-enterprises, yet only a small fraction access formal credit through the banking system—even among the roughly 15 million GST-registered entities. While crediting government initiatives like the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises-a central government scheme which repays default loans of SMEs subject to conditions) program, which has operated for over 25 years, he noted that uptake remains limited.

Cumulative guarantees under such schemes represent only single-digit percentages of MSMEs' over Rs 100 lakh crore contribution to GDP. He stressed the need for more targeted efforts to channel credit directly to micro-enterprises and suggested several avenues for improvement. The discussion turned to innovative mechanisms like linking GeM (Government e-Marketplace-Procurement portal for government departments) with TReDS (Trade Receivables Discounting System-a financing system for MSMEs based on their receivables) and securitizing receivables, seen as potential breakthroughs for MSME liquidity.

A member of the SME chamber highlighted TReDS's long-standing journey—compulsory for corporates and PSUs for years—and its role in ensuring timely payments, a persistent pain point that often pushes MSMEs toward loan defaults in banks. He recalled pushing for such platforms during Raghuram Rajan's tenure as RBI Governor, arguing that without better receivable financing, many MSMEs reluctantly accept unfavourable terms from corporate buyers. He urged monitoring corporate and multinational adoption over the next few months, expressing hope that stronger enforcement by government entities like railways and PSUs could improve cash flows and reduce NPAs.

A key point of contention was the structural evolution needed for MSMEs to compete globally. A representative of the electronics industry challenged the notion that "small is beautiful," asserting that with trade deals opening foreign markets, Indian firms must integrate into global value chains, leaving product marketing to larger players. Export potential was hailed as a game-changer, with several from the banking industry mentioning about the opportunities in European and US market. However, servicing distant clients demands a "DNA" of reliability, systems, automation, and R&D—investments small firms struggle with alone due to limited resources and quarterly market pressures.

Innovation and R&D sparked lively exchanges on collaboration. The electronics industry representative proposed a cluster approach where comparable companies form joint R&D entities, pooling resources to avoid redundant efforts. He contrasted this with China's state-funded model, noting India's democratic constraints, and praised the government's 1 lakh crore R&D fund offering low-cost debt. A top executive of a private bank highlighted India's sub-1% R&D spend as a GDP percentage, far below scaled economies, and cited successes in space and defence where patient capital has led to listings like Agnikul.

She urged equity investors to capitalize on growth potential, especially with lucrative tariffs boosting exports. She added details on credit risks, pointing to state-level variations—like Uttar Pradesh's 20.7% credit growth via cluster initiatives such as One District One Product (ODOP)—which simplify assessments by clarifying supply chains and business models.

Talent and skilling were flagged as parallel bottlenecks. It was more or less agreed upon that that alongside credit, skilling is essential for investor confidence, urging MSMEs to adopt AI and ML for data-backed projections.The whole discussion left a clear message—India's manufacturing renaissance hinges on turning trade deals into actionable growth through innovation, data and unified efforts.