As global trade tensions and energy disruptions strain supply chains and raise costs, India must move beyond short-term relief to build resilient, agile, and financially robust MSMEs that can anchor its next phase of growth
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The micro, small and medium enterprises (MSMEs) segment in India has battled through a rough year, compelling it to adapt to a shifting geopolitical landscape. First, trade restructuring and US tariffs dampened India’s export competitiveness and posed a serious threat to livelihoods, affecting millions of low-skilled and semi-skilled workers. More recently, the US-Israel conflict with Iran has sent tremors through the heart of the Indian economy, manifested in disruptions in the supply of commercial LPG cylinders and increases in freight, fuel, and raw material prices.
For instance, Morbi in Gujarat, one of the country’s largest ceramic clusters, has witnessed the closure of 100 ceramic units due to disruptions in propane supply. If the situation fails to ease, 400 additional propane-based units are likely to shut down operations. India’s textile industry, which is dependent on petroleum byproducts, has seen a rise in raw material prices, labour shortages, and increased freight costs, resulting in a reported loss of INR 100 crore per day. Similarly, the plastics and polymers sector, where most industries are characterised as MSMEs, is facing acute raw material shortages. Several associated industries, such as agricultural equipment, toys, and healthcare, have sought government support in response to rising manufacturing costs.
Indian MSMEs are particularly vulnerable to external shocks because of their thin capital margins, high input dependence, weak market access, low technology adoption, and fragmented infrastructure.
To enable assistance for the MSME segment, the Centre has responded to rising crude prices by reducing excise duty on petrol, fully exempting diesel from excise duty, and imposing an export duty on aviation turbine fuel to strengthen domestic supplies. To support trade, the government has launched RELIEF (Resilience & Logistics Intervention for Export Facilitation) under the Export Promotion Mission. The scheme is time-bound and aims to shield Indian exporters from high freight costs, increased insurance premiums, and export risks due to disruptions in the Strait of Hormuz. Additionally, the Directorate General of Foreign Trade has extended the RoDTEP scheme until 30 September 2026 to offset embedded taxes and duties in exported goods. Further, the government is considering a 3-6-month loan repayment moratorium for industries affected by war-related disruptions. This temporary relief would help borrowers manage economic stress as input costs, logistics expenses, and market uncertainty rise. A similar moratorium was implemented during the COVID-19 crisis to help businesses absorb external shocks and avoid widespread distress. The central bank has also announced an extension of the enhanced export credit period up to 450 days for pre-shipment and post-shipment finance.
Even as these external shocks remain unprecedented, they expose a deeper fault line: the enduring vulnerability of MSMEs to disruption. Indian MSMEs are particularly vulnerable to external shocks because of their thin capital margins, high input dependence, weak market access, low technology adoption, and fragmented infrastructure. The imperative question now is how these enterprises can be made resilient enough to withstand and absorb such shocks.
First and foremost, it is crucial to enhance the working-capital resilience of MSMEs, as day-to-day cash flow serves as a critical liquidity buffer to cushion the blow of rising input prices. This transformation should take the form of a long-term policy shift, with stronger enforcement of faster settlement regulations, wider use of invoice receivables–based finance, and deeper adoption of Trade Receivables Discounting System (TReDS) through the expansion of the pool of buyers, financiers, and public procurement flows.
It is crucial to enhance the working-capital resilience of MSMEs, as day-to-day cash flow serves as a critical liquidity buffer to cushion the blow of rising input prices.
Currently, labour-intensive manufacturing in India remains widely dispersed, resulting in fragmented supply chains and weak localisation that can drive up production costs. The policy focus must shift towards building supply chains that enable smoother raw material sourcing, stronger supplier networks, and more efficient logistics and warehousing. Cluster-based models, anchored in shared infrastructure and localisation, can create more integrated value chains and help India move up the manufacturing ladder by offering end-to-end production capabilities. Such concentration and coordination can serve as a buffer during geopolitical shocks by reducing dependence on distant or vulnerable supply routes, improving access to alternative suppliers, and enabling production networks to adjust more quickly when supply chains are disrupted.
Agility through technology adoption is another characteristic that can make MSMEs more competitive and better prepared to handle global shocks. AI can be especially useful in anticipating inventory needs, forecasting demand, tracking orders, and managing delivery timelines across global markets. It can support MSMEs in keeping pace with changing international demand patterns, shipment schedules, and logistics disruptions, allowing them to plan production and delivery more effectively. AI-based applications can enhance MSMEs’ logistics performance by enabling route optimisation and reducing delivery timelines by 15–20 percent. A stronger digital presence can also open more doors for enterprises through e-commerce and the building of brand reputation.
AI can be especially useful in anticipating inventory needs, forecasting demand, tracking orders, and managing delivery timelines across global markets.
Other measures to ease market access include trade facilitation through procedural simplification. A study by the Central Board of Indirect Taxes and Customs (CBIC) found that the simplification of processes through digital application systems and assistance increased MSME participation in voluntary World Customs Organization–based compliance certification for businesses engaged in international trade.
With this long-term agenda in place, MSMEs must be equipped not just to compete, but to withstand the mounting uncertainties of an increasingly volatile geoeconomic landscape. It is time to position MSMEs not as small and outdated, but as small, agile, adaptive, and pivotal to India’s next growth story.
Shruti Jain is an Associate Fellow with the Centre for Development Studies at the Observer Research Foundation.
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Shruti is an Associate Fellow at the Centre for Development Studies, Observer Research Foundation (ORF), where her research examines the intersections between policy, economic diplomacy ...
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