Beyond the tariff tears: The 99 per cent opportunity in India's MSME engine

The recent spectre of 50 per cent “Trump tariffs” targeting key Indian export sectors — particularly textile, sea food, and gems and jewellery — has generated understandable anxiety across several geographical clusters. The anticipation of a financial squeeze on micro, small, and medium enterprises (MSMEs) in Surat, where 80 per cent of diamond-export units are concentrated, and in Tiruppur, where garment exporters face the potential of cumulative duties soaring over 61 per cent, is a genuine crisis. These tariffs, which are seen to affect sectors that account for a significant 25 per cent of India’s exports to the United States, are a palpable threat to firms with limited margins and pricing power, compelling them “to the wall”. 

This immediate distress, however, must be framed against the colossal, untapped potential of the MSME ecosystem. The national dialogue and the media focus, currently dominated by the grief of the afflicted, risks missing the strategic opportunity presented by the vast, non-exporting majority. 

The number of exporting MSMEs, despite a commendable trebling in the last four years, was a meagre 173,350 in May last year. When viewed against the 73 million-strong MSME base, this figure represents a minuscule 0.236 per cent. Put simply, the enterprises generating nearly half of India’s exports (45.79 per cent precisely) are less than one-quarter of 1 per cent of the MSME base. The real economic lever — the engine of future export-led growth — is the remaining enterprises, which are serving only the domestic market or operating in the informal economy. 

The geopolitical invitation and the 99% 

The current global scenario — a matrix of geopolitical conflict, pandemic aftershocks, rising logistics costs, and stringent ESG (economic, social, and government) mandates — is driving an irreversible shift in multinational corporate strategy. Global value chains (GVCs) are moving decisively away from single-region sourcing toward diversified, de-risked, and resilient supply ecosystems. India’s strategic challenge is to mobilise its core enterprises to secure the “China+1” mandate and transform its economy from one that merely navigates disruption to one that dominates the supply-chain recalibration. 

The large majority of India’s MSMEs are micro enterprises, many of them informal. They lack the scale, technology, and governance structures to meet the stringent demands of GVCs in several critical areas, including adherence to complex international certifications (like the norms of the International Standards Organisation, Conformité Européenne marking, and Total Quality Management), the ability to execute sophisticated inventory management models, such as “just-in-time (JIT) and lean manufacturing”, which rely on digital integration and high logistical reliability, and integration with Industry 4.0 tools, which are mandatory for real-time supply-chain synchronisation. 

This gap explains why only a small tier of well-capitalised, mid-sized firms currently drive the bulk of the MSME export growth, as highlighted by a recent NITI Aayog analysis. The opportunity for India lies in converting the vast, dormant base into a formal, GVC-ready supplier pool. 

To harness this opportunity, a strategic pivot from general welfare measures to targeted, execution-focused intervention is required. Access to finance remains the single biggest constraint. The sector faces an estimated credit demand-supply mismatch of up to ₹30 trillion, with micro-enterprises disproportionately affected. Integration into GVCs requires fresh capital specifically directed at technology upgrades, involving funding for new machinery, certification compliance, and digital tools.  Policy must incentivise FinTech solutions that move beyond traditional collateral and use goods and services tax/Udyam data for dynamic, artificial intelligence-driven credit scoring, facilitating factoring and working-capital needs for export orders. What would also help is a system of cluster financing with the creation of specialised, government-backed funds that offer competitive interest rates and long-term capital based on the export potential of specific clusters. 

Policy would also need to understand that a “one-size-fits-all” regulatory approach severely penalises micro and small firms, which require simplified compliance regimes and digital governance that dramatically cut the regulatory clutter. 

Furthermore, while the macro-level estimate for logistics cost for India is now a competitive 7.97 per cent of gross domestic product, the granularity matters. A recent report by the Department for Promotion of Industry and Internal Trade and National Council of Applied Economic Research reveals that small firms (with a turnover below ₹5 crore) incur logistics costs as high as 16.9 per cent of their output, compared to 7.6 per cent for large firms. This disparity instantly renders small enterprises uncompetitive. 

The execution of the PM Gati Shakti National Master Plan must be accelerated to build multi-modal logistics parks, which offer shared warehousing and efficient first/last-mile connectivity, thereby pooling costs and reducing the burden on small players. It would also help to mandate the use of the Unified Logistics Interface Platform for MSME cargo to ensure complete, paperless, and low-cost tracking, which meets GVC traceability requirements. 

Technology is inert without skilled labour. India must rapidly scale up vocational programmes focused on the skills GVCs demand: Quality assurance, digital operations, machine maintenance, and supply-chain management. This must be coupled with the establishment of shared testing facilities and certification hubs in manufacturing clusters. These facilities spread the fixed costs of compliance across multiple small firms, building the buyer confidence necessary to plug into multinational supply chains. 

The global economy is diversifying its supply chains. This current confluence of tariffs and trade reconfiguration offers India an extraordinary opportunity to transform its massive MSME sector. However, the window for action is narrow. If India fails to move quickly and decisively to empower its 99.76 per cent, the opportunity will inevitably be seized by more agile competitors like Vietnam, Mexico, or Indonesia. The road to becoming a global manufacturing powerhouse is paved not with intent but with rigorous, focused, and large-scale execution. 

The author is professor, economics, and executive director, Centre for Family Business & Entrepreneurship, SP Jain Institute of Management and Research. The views here are personal