OPINION | Budget 2026 and the MSME Growth Agenda: Reducing compliance burden and enabling scale 

MSME scale will remain constrained without access to timely and affordable credit.

Micro, Small and Medium Enterprises (MSMEs) are central to India’s growth story, contributing nearly 30% to GDP, around 35% of manufacturing output and over 45% of exports. MSMEs contribute nearly 62% to employment. Despite this economic significance, MSMEs continue to face structural constraints - particularly regulatory complexity, fragmented compliance requirements and constrained access to affordable growth capital. These challenges are now being further compounded by rising protectionism and fragmentation across global supply chains, constraining the sector’s ability to scale and compete.

As India approaches the Union Budget 2026, policy expectations have shifted beyond short-term relief towards addressing these systemic bottlenecks. The next phase of MSME reform must therefore focus on simplifying regulatory frameworks, easing capital constraints and recalibrating policy architecture from one centred on survival to one that actively enables scale and competitiveness.

The compliance paradox and need for rationalisation

Over the past decade, India’s formalisation initiatives - spanning GST, digitised tax administration, and labour law consolidation - have undoubtedly strengthened transparency and expanded the tax base. Much of this compliance architecture, however, has evolved around the operational scale and systems of larger enterprises. Particularly, for micro and small units, the same frameworks translate into disproportionately high compliance costs and managerial intensity.

With limited financial and administrative capacity, regulatory compliances consume a significantly higher share of resources for smaller firms than for large corporations. This imbalance discourages formalisation and incentivises firms to remain below regulatory thresholds. Budget 2026 must therefore prioritise compliance rationalisation rather than incremental digitisation, with greater emphasis on proportionality and simplicity.

Translating simplification into liquidity

For MSMEs, regulatory complexities are not merely procedural challenges - it directly translates into working capital stress. Advance tax outflows, delayed refunds and procedural disputes immobilise scarce financial resources. Consequently, for compliance reforms, they must provide measurable liquidity relief.

Building on this foundation, one immediate lever could be the implementation of quarterly GST return filing and tax payment as a default for MSMEs up to a higher turnover threshold, coupled with a lower interest rate. These would meaningfully ease cash-flow pressures.

This linkage between compliance design and liquidity is also particularly visible in the aftermath of recent GST rate rationalisation. While the revised slab structure lowered prices for consumers, many MSMEs now face an inverted duty structure, where inputs are taxed higher rate than finished products. This has increased refund dependency, leaving significant working capital stranded for extended periods. Thus, a time-bound, automated refund mechanism, along with selective rate corrections, would directly convert compliance simplification into usable liquidity. Extending refund eligibility to GST paid on capital goods (under the inverted duty structure) would further reduce the burden of working capital blockage for smaller units.

Beyond domestic taxation, export facilitation schemes under the Foreign Trade Policy - such as Advance Authorisation and EPCG - are designed to conserve working capital by allowing duty-free imports of inputs and capital goods. In practice, however, stringent compliance conditions, manual processes and officer-driven closures often deter MSME participation. End-to-end digitisation and automatic licence closure upon fulfilment of export obligations would reduce discretion and allow MSMEs to access these schemes on a more equal footing with larger exporters.

Regulatory certainty is equally critical. For MSMEs, uncertainty often imposes a higher cost than tax incidence itself. Aggressive audits and prolonged litigation lock up both capital and management bandwidth. Strengthening dispute resolution through time-bound conclusion and reduced pre-deposit requirements for MSMEs would materially support working capital requirements.

Credit access, innovation and technology adoption

Even with regulatory simplification, MSME scale will remain constrained without access to timely and affordable credit - particularly in a volatile global trade environment. Tariff actions and demand shocks have weakened cash flows, especially in export-linked segments. Accordingly, measures such as interest subvention, extension of NPA recognition norms and incremental credit lines under an ECLGS-type framework can help stabilise capital structure.

Capital constraints also limit MSME investment in innovation and product development. For the sake of comparison, China’s “Little Giants” programme - under which niche, innovation-driven SMEs in strategic sectors are identified and supported - offers a relevant reference point. A calibrated approach in India, focused on selectively supporting high-potential MSMEs in technology-intensive areas such as robotics, drones, defence manufacturing and electronics, could strengthen innovation capacity through targeted funding and measured tax incentives.

At the same time, MSMEs continue to face challenges in adopting advanced technologies due to low capital intensity. While initiatives such as the RAMP programme mark progress, technology adoption remains uneven. Greater emphasis on targeted financing would help extend productivity gains across a wider segment of enterprises.

To conclude, India’s economic ambitions cannot be realised without MSMEs that are more productive and globally competitive. To support the MSMEs, over the past decade, the government has implemented a range of initiatives - from ZED certification, credit guarantee schemes, to RAMP. Budget 2026 presents a pivotal opportunity to build on this foundation - not by merely layering new schemes, but also by simplifying everyday regulatory interactions and enabling access to patient capital.

(Rahul Khurana, Partner and Ashish Garg, Principal Associate at Economic Laws Practice.) 

The above article does not constitute legal advice. The views expressed here are personal and do not represent the stand of this publication.