MSMEs brace for a challenging year

For firms in general, IIMA’s latest Business Inflation Expectations Survey reported a turnaround in responses in February - about 32 percent of the firms reported ‘much less than normal’ sales, significantly higher than the 23 percent reported in January 2025. Now, with the entire world economy in a flux, the RBI has revised the growth forecast downwards to 6.5 percent for FY26. A breakthrough to faster growth for MSMEs appears more elusive this year.

Sectors likely to be hit by Trump tariffs

Our MSMEs, that form the bulk of the manufacturing sector, will be facing direct and indirect impacts of the tariff policy, as the ripple effects of these moves are far reaching. To begin with, there are sectors where small businesses are dominant in the export markets – for example, gems and jewellery, which has a large presence of MSMEs, was already impacted by global churn in demand. India’s exports in this sector fell by 11.72 per cent YoY in FY25, despite some signs of turnaround early this year. Currently, the US accounts for 30 percent of India’s jewellery exports, and import duty used to be 5.5-7 percent levied by the US. Indian cut and polished diamonds had duty-free access to the US and has been facing hard times with competition from lab grown diamonds.

Auto ancillaries, electronics and electrical machinery, textiles and apparel are other sectors where US markets account for a large share of exports and which will see disruption. While pharmaceuticals have so far been exempted from the new regime, this may be short-lived relief. Another sector bracing for serious impact is the Indian seafood exporters, which is the largest exporter to the US, accounting for 35 percent of the market share. Ecuador, which is the second largest exporter of seafood to the US, has just a 10 percent retaliatory tariff.

While export-led sectors will be looking to the government to negotiate more favourable tariff deals ahead, they will also have to start a concerted effort at diversification of markets. There are also reports of global manufacturers looking to relocate some production facilities to the US. In addition to this mix, there is another complication of dealing with Chinese dominance in markets and its retaliatory moves. As all countries are now in similar situations, the dynamics of the global markets will get quite competitive and intense.

Second-order effects

There are also MSMEs that are not direct exporters but will face the brunt of the changing global landscape - small businesses that are in the supply chain of large firms with significant exposure to the US market. We find that about a quarter of the MSMEs that supply to the core business of such firms in the auto component segment are typically micro enterprises, and around half are small firms. These firms will have to navigate the production decisions of the large companies, in response to the US tariffs.

Added to this mix, is the domestic macro environment. As the RBI has noted in its latest monetary policy statement on April 9th, uncertainty dampens growth as it affects investment and spending decisions of firms and households. However, there are a number of positives. An above-average monsoon forecast should boost rural incomes and demand. With inflation pressures moderating and potential tax benefits coming through this year, discretionary incomes should improve.

Then there has been a surge in government investment proposals in Q4 FY25 to the tune of Rs.18.7 trillion, accounting for half of the total new projects announced for the entire year and this is a 117% year-on-year rise in new government projects. However, private investment was still subdued, with new project announcements up by only 3.3 percent YoY in Q4, and is unlikely to push up further this year, in the face of uncertainty.  While small businesses in the supply chain will benefit as and when these projects commence, the pace of completion will be critical for growth.

Apart from negotiating tariff deals, the government should also look into the various issues that impact competitiveness of our small businesses, especially compliances that mar ease of doing business. All in all, the year ahead will be extremely challenging and Indian small firms will look to the government for the right interventions and incentives to stabilise the MSME sector during these times.

(Sumita Kale and Narasimhan V. are Advisors with Jocata)

Views are personal and do not represent the stand of this publication.