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Nilanjan Ghosh and Shruti Jain, “A Framework for a Production-Linked Export-Oriented Incentive Scheme for Indian MSMEs,” ORF Occasional Paper No. 541, Observer Research Foundation, April 2026.
Micro, small and medium enterprises (MSMEs) are crucial to India’s economic growth, contributing 30.1 percent of the nation’s Gross Domestic Product (GDP).[1] They also employ about 23.24 crore individuals across 6.45 crore enterprises as of June 2025.[2] They account for 35.4 percent of manufacturing, while over the last five years, the share of MSME-related products in the Indian economy’s total exports has hovered around 45–50 percent.[3] Despite their scale, MSMEs face fragmented production structures, limited technological absorption, and constrained access to finance, markets, and infrastructure.
The MSME Act (2006) established the National Board for MSME and defined MSME classification metrics. Unlike other economies, the Act defines MSMEs using revenue and investment as metrics, rather than the number of people employed. Threshold-based concessions and incentives, however, lead MSMEs to cap their size to avail benefits; to this effect, the Economic Survey 2023–24 called for sunset clauses for the threshold-based incentives.[4] This makes inter-country comparison of MSMEs, in terms of their operational efficiency or economic contribution, difficult.
The Union Budget 2025 introduced a revised classification for MSMEs. Under this, an enterprise is considered ‘micro’ if the investment in machinery, equipment, or plant is not more than INR 2.5 crore and the annual turnover is equal to or less than INR 10 crore. The investment of ‘small’ enterprises in machinery, equipment, or plants is not more than INR 25 crore and their annual turnover is not more than INR 100 crore. A ‘medium’ enterprise’s upper ceiling of investment is INR 125 crore, and annual turnover is less than INR 500 crore.[5]
Table 1: Classification of MSMEs in 2025
| Enterprise | Previous Investment Limit | Revised Investment Limit | Previous Annual Turnover Limit | Revised Annual Turnover Limit |
| Micro | Up to INR 1 crore | Up to INR 2.5 crore | Up to INR 15 crore | Up to INR 10 crore |
| Small | Up to INR 10 crore | Up to INR 25 crore | Up to INR 50 crore | Up to INR 100 crore |
| Medium | Up to INR 50 crore | Up to INR 125 crore | Up to INR 250 crore | Up to INR 500 crore |
Source: Ministry of Micro, Small and Medium Enterprises (MoMSME), 2025.[6]
Ninety-nine percent of the total registered MSMEs in India can be categorised as ‘micro’. The key MSME products exported include engineering goods, gems and jewellery, ready-made garments (RMG), rice, chemicals, marine products, and pharmaceuticals.[7] Gujarat and Maharashtra are the top states for total registered MSME-led exports. According to the Ministry of Micro, Small and Medium Enterprises (MoMSME), Maharashtra, Uttar Pradesh, Tamil Nadu, West Bengal, Karnataka, Madhya Pradesh, Rajasthan, and Gujarat have the highest number of MSME registrations, with 60 percent of total MSMEs being male led.[8]
MSME activity in India includes trading, services, and manufacturing. Most of them account for sale of goods (trading) at 44.8 percent, followed by services at 34.9 percent and manufacturing at 20.4 percent.[9] Within trade, 87 percent of MSMEs are in retail, followed by wholesale trade and maintenance of motor vehicles. Under services, MSMEs mostly engage in land transport, community and personal services, and food and accommodation. In manufacturing, the highest share of MSMEs (44.33 percent) is in apparel, followed by tobacco and food products.[10]
Figure 1: GDP Share of MSMEs in Asia (%)
Source: Compiled and created by the authors using multiple country sources (2021–24).[11]
Table 2: MSME Export Classification by Commodity
| Commodity | Percentage Share in Total MSME Exports |
| Engineering Goods | 19.64 |
| Gems and Jewellery | 12.3 |
| RMG | 8.52 |
| Rice | 6.22 |
| Organic and Inorganic Chemicals | 5.7 |
| Marine Products | 4.8 |
| Drugs and Pharmaceuticals | 3.86 |
| Cotton Yarn/Handloom Products | 3.66 |
| Electronic Goods | 3.63 |
| Leather | 2.71 |
Source: DGCI&S on MSME, 2024.[12]
Table 3: Priority Sectors for Top MSME Goods-Exporting States
| State | Priority Sectors |
| Maharashtra | Textiles, Pharma, Chemicals, Automobile, Engineering Goods, Leather |
| Uttar Pradesh | Food Processing, RMG, Metal, Textiles, Ceramic |
| Tamil Nadu | Coir, Automobile, Food Processing, Textiles, Leather, Engineering Goods |
Source: Niti Aayog, 2025.[13]
Figure 2: Percentage Share of Commodity Groups in Total Exports by MSMEs
Source: DGCI&S on MSME, 2024.[14]
Figure 3: Data on Number of MSMEs (Lakhs) by State
Source: Dashboard, MoMSME.[15]
Despite the sector’s contribution to the Indian economy, it has frequently been seen as uncompetitive as per global standards due to low labour productivity and technological intensity (often defined in terms of the capital–labour ratio), fragmented scale and informality, limited export penetration, low credit and capital access, high logistics and transaction costs, below-par quality, certification gaps, weak global value chain (GVC) integration, and structural human capital constraints stemming from inadequate access to state-of-the-art training and advanced skills.[16],[17] In a competitive and value-chain-integrated global economy, it is imperative for the Indian MSME sector to transcend its traditional subsistence and domestic-market orientation and evolve for better production and export growth. India’s trade policy under Viksit Bharat@2047 envisages its economy among the world’s top manufacturing and export hubs. This demands a deliberate reconfiguration of MSME incentives away from generic subsidies and protection and towards production-linked, performance-oriented, and globally competitive frameworks.
While large enterprises have benefited from the Production-Linked Incentive (PLI) schemes across sectors, MSMEs have mostly remained outside this ecosystem due to scale, compliance, and credit constraints. This has limited the diffusion of productivity and export dynamism. A Production-Linked Export-Oriented Incentive Scheme (PEOIS) tailored for MSMEs can bridge this gap by incentivising production efficiency, technological upgradation, and export readiness, while retaining fiscal prudence and World Trade Organization (WTO) compliance.
This paper aims to design such a framework, resting on three pillars—production incentives, export orientation, and incentive rationalisation. Production incentives will stimulate formalisation and economies of scale, creating a virtuous cycle of investment and output. Export orientation will foster competitiveness, quality assurance, and integration with GVCs. Incentive rationalisation will reduce fiscal leakages by linking disbursements to measurable outcomes, such as production volume, value addition, and export growth, rather than static entitlements. Finally, the proposed incentive structure is largely production-linked and performance-based—its objective is not equity promotion and distributive justice, although they may be positive externalities. Therefore, input-based subsidies, including credit guarantees and special provisions for MSMEs operating in remote areas, are excluded. These subsidies should be uniform across all MSMEs based on equity principles, while the present incentive is designed to reward efficiency (that also includes sustainability).
In India, most MSMEs are categorised as ‘micro’ enterprises, followed by the ‘small’ category. This underscores a deeper structural constraint—‘the missing middle’—the micro and small enterprises are trapped in their own operational scales, with few able to expand and graduate to the ‘medium’ enterprise classification.[18] Firms often fail to scale up due to technological and regulatory challenges. Recognising this, the Government of India has undertaken several regulatory and policy initiatives to support MSMEs. These span financial support, employment generation, digital transformation, formalisation, a cluster-based approach, manufacturing, and public procurement. The total budget outlay for MSMEs has consistently increased over a period of five years, with a compound annual growth rate (CAGR) of 25.85 percent per year, the outlay for FY26 being almost INR 23,168 crore.[19] Additionally, the Foreign Direct Investment (FDI) policy has been relaxed to allow a 100 percent inflow under the automatic route to attract investors.
Figure 4: Budget Estimate (INR Crore)
Source: Dashboard, MoMSME.[20]
The main MoMSME schemes and their functions are given in Table 4 below. Among them, funding is largely directed at ‘micro’ enterprises and concentrated in schemes that aim to provide affordable credit and employment generation, such as the Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE), the Prime Minister’s Employment Generation Programme (PMEGP), and the PM-Vishwakarma.[21] State-led MSME policies provide stamp-duty and registration-fee waivers, power-tariff support, intellectual property (IPR) support, land and conversion incentives, and tax-linked benefits (for example, Telangana’s innovation fund, and Maharashtra’s industrial promotion subsidy and power tariff support [see Table 5]).
To address the tendency of MSMEs to remain between micro and small to avoid the regulatory radar, the central government has taken various steps, including increasing floor margins for MSME classification, streamlining and digitising processes to deregulate the sector, simplifying taxation laws, rationalising labour laws, and decriminalisation of business laws through the Jan Vishwas Act.[22] Several state governments have also contributed—for instance, the Punjab government has created a grievance redressal mechanism and eased land, labour, and fire-safety regulations.
Figure 5: Classification of MoMSME Support and Incentives
Source: Authors’ own using data from the MoMSME, 2025.[23]
The infrastructural development programme has been strengthened by the central government’s MSME–Cluster Development Programme (MSE-CDP) that provides financial assistance to state governments to improve competitiveness and productivity. Since FY15, 513 clusters with a total grant of INR 1,336 crore,[24] 227 Common Facility Centres, and 353 Infrastructure Development Centres have been approved.[25] As of 2025, 376 clusters are operational across sectors including agro, textile, coir, bamboo, handicraft, honey, and khadi, with the highest numbers in Uttar Pradesh (44), Odisha (39), Madhya Pradesh (35), and Assam (33).[26]
The Union Budget 2026–27 promotes MSMEs largely through input-side incentives that ease operational conditions, and help MSMEs self-finance and achieve scale. It proposes to improve working-capital access by expanding the use of the Trade Receivables Discounting System (TReDS), including better systems for receivable financing,[a] so that MSMEs can obtain cash against invoices and ease cash-flow stress.[27] It also includes a dedicated INR 10,000-crore SME Growth Fund to nurture future ‘champions’ by incentivising enterprises that meet certain criteria. It enables capital access and scale-readiness by augmenting the Self-Reliant India Fund (set up in 2021) by INR 2,000 crore.
However, these measures do not necessarily ensure improvements such as productivity gains, export growth, quality upgrades, and formal job creation. To convert financing and facilitation into measurable competitiveness, India needs a stronger layer of output-based/outcome-rewarding incentives.
Table 4: Relevant MoMSME Schemes
| Scheme | Purpose |
| Prime Minister’s Employment Generation Programme (PMEGP) | Credit-linked subsidy programme to generate employment by setting up new micro enterprises. Maximum cost of the unit allowed in manufacturing sector is INR 50 lakh and in the business or service sector INR 20 lakh. |
| Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) | Facilitates flow of affordable institutional credit. Promoters of MSME unit will be provided credit facility up to 50 percent of their stake in the MSME entity, or INR 75 lakh. |
| Micro & Small Enterprises Cluster Development Programme (MSE-CDP) Scheme | Sets up Common Facility Centres (CFCs) and infrastructure development. |
| Scheme of Fund for Regeneration of Traditional Industries (SFURTI) | Creates clusters for traditional artisans. Provides financial assistance up to INR 8 crore with an outlay of INR 149.44 crore. |
| Entrepreneurship Skill Development Programme (ESDP) | Financial assistance to national training institutions under the Ministry of MSMEs for skill development and training infrastructure. |
| Procurement and Marketing Support (PMS) Scheme | Mandates public sector companies to purchase from MSMEs up to 25 percent, including 4 percent from SC/ST-owned MSMEs and 3 percent from women-owned ones. |
| International Cooperation (IC) Scheme | Provides MSMEs with global market access through financial assistance for participating in international events like trade fairs. |
| PM Vishwakarma | Enables artisans and craftspeople to scale up their enterprises through credit support, marketing support through registrations on GeM portal, and exhibitions. |
| MSME Champions Scheme | Improves MSME-ESG standards and process efficiency; promotes MSME innovation through incubation, IPR, and digital transformation. |
| Self-Reliant India (SRI) Fund (funding through equity, allows them to list) | Equity infusion up to INR 50,000 crore with the objective of supporting venture capital (VC)/private equity (PE) firms investing in MSMEs. |
| Raising and Accelerating MSME Performance (RAMP) | Boosts the performance of MSMEs through improved market access, finance, and technology. |
Source: Compiled by authors.
Table 5: State-led MSME Policies
| State | Type of Incentives | Select Schemes |
| Telangana | Innovation fund, capital and interest support, single-window approvals, fiscal reliefs | T-IDEA (Telangana State Industrial Development and Entrepreneur Advancement) Incentive Scheme 2014, T–PRIDE (Telangana State Programme for Rapid Incubation of Dalit Entrepreneurs) Incentive Scheme, Telangana State Industrial Project Approval and Self-Certification System (TS-iPASS) |
| Maharashtra | Industrial promotion subsidy, power tariff support, electricity-duty exemption, stamp-duty waiver | Industrial Promotion Subsidy (IPS), Interest Subsidy Incentive, Exemption from Electricity Duty, Waiver of Stamp Duty |
| West Bengal | Capital and interest subsidy, sectoral incentives, industrial parks, rural entrepreneurship facilities | Bhabisyat Credit Card Scheme, Banglashree Scheme, Interest Subsidy on Term Loan (IS), Textile Incentive Scheme, Incentive Scheme 2020 for approved Industrial Park |
| Uttar Pradesh | Skilling and marketing, industrial parks, land/conversion waivers, capital and infrastructure interest subsidy, VC fund, electricity charge reimbursement | One District One Product (ODOP) Scheme, Common Facility Centre (CFC) Scheme, Marketing Development Assistance Scheme, Skill Development and Toolkit Distribution Scheme, Scheme for Promoting Establishment of Private Industrial Parks 2017 |
| Gujarat | Capital and interest subsidy, SGST reimbursement; quality ZED support, patent/energy-water saving, rent and power reimbursements, SME exchange fundraising | Gujarat Industrial Policy 2020, Gujarat MSME Export Promotion Scheme, Assistance of Capital Investment Subsidy, Assistance for Quality Certification (ERP Assistance), Financial Support to MSMEs in ZED Certification |
| Tamil Nadu | Quality certification reimbursements, entrepreneurship schemes, SME exchange fundraising, power and interest subsidies | Q-Cert, Promotion of Energy Audit and Conservation of Energy, New Entrepreneur Cum Enterprise Development Scheme, Annal Ambedkar Business Champions Scheme (AABCS) |
Source: Niti Aayog, 2025.[28]
Despite being the backbone of the Indian economy, MSMEs face several challenges. Most of them are classified as ‘micro’, so they mostly operate within informal supply chains, limiting their access to formal credit, technology, and skilled labour. They are often unable to reap the benefits of economies of scale due to high costs. In terms of exports, it can be difficult for MSMEs to meet global compliance standards and stay integrated in GVCs.
Many MSMEs operate in the ‘grey zone of informalisation’. This denies them access to formal credit systems, formal supply chains, and governmental schemes. To accelerate formalisation, the central government has introduced the Udhyam Registration Portal (URP) and the Udhyam Assist Platform (UAP).[29] The URP, designed for MSMEs already in the formal set-up with necessary documentation (permanent account number [PAN] and goods and services tax [GST] number), provides the enterprises with a formal digital identity, enabling access to credit, government schemes, and legal protections. The Udyam Assist Platform (UAP) complements this by bringing informal micro enterprises into the MSME ecosystem, assisting their registration process, expanding their access to credit, and creating a pathway toward gradual formalisation. Despite this, a significant number of MSMEs remain unregistered.[30]
This remains the biggest obstacle for Indian MSMEs. They are considered relatively high risk, which restricts their access to formal financial capital.[31]
Although the credit share for micro and small enterprises has risen from 14 percent in 2020 to 20 percent in 2024, a credit gap of INR 30 lakh crore persists (as of FY25), mostly for service-based and women-owned MSMEs.[32] Of the 6.35 crore MSMEs on the URP, only 3.68 crore have accessed credit. In FY24, about INR 2 lakh crore worth of collateral-free guarantees were approved, but that is insufficient to bridge the large credit gap.[33] MSMEs also face high credit costs measuring up to 12.27 percent, which is significantly above the repo rate.[b],[34]
However, the fact that New-to-Credit (NTC) now accounts for a major portion of MSME lending, with 50 percent of originations to small enterprises being NTC, is a positive trend.[35] Seasoned borrowers can avail of higher limits, longer terms, and better interest rates due to the credibility built by a history of responsible borrowing. Credit availability also differs for different security types,[36] being highest for gold-secured loans. For MSMEs with high-rated buyers (such as public sector undertakings), invoice-based lending is increasing.
The Trade Receivables Discounting System (TReDS)[c] also helps MSMEs access working capital. In FY24, TReDS platforms financed INR 1.38 lakh crore of invoices, with the Receivables Exchange of India Limited (RXIL) alone accounting for INR 80,500 crore. However, digitalisation and lack of awareness remain roadblocks.
Another reason for the lack of working capital is limited formal documentation, which reduces collateral. A 2025 MSME survey found that 31 percent of the respondents used their own capital and 5 percent relied on informal credit for their working capital.[37] Out of those who could access institutional credit, 98 percent reported that it was insufficient to meet their requirements.[38]
Labour-intensive MSMEs that produce goods have low margins, making them sensitive to high logistical costs, tariffs, and non-tariff changes. These weaken India’s export competitiveness and threaten livelihoods, affecting millions of low-skilled and semi-skilled workers.[39] Compliance costs in manufacturing can reach INR 13–17 lakh annually,[40] while logistical costs are estimated at 7.97 percent of the total GDP due to India’s logistics sector being fragmented. India ranked 38th out of 139 countries in the World Bank’s Logistics Performance Index (LPI) 2023, which, while better than some of its Asian counterparts, means it is behind manufacturing hubs such as Japan, Korea, China, and Thailand.[41]
Road is most preferred mode of transport for freight, accounting for two-thirds of tonne-km, despite rail being a faster and cheaper option per unit.[42] This is owing to better last-mile delivery and flexibility provided by road transport. A wide range of stakeholders involved in the process and a number of requirements to be met—20 agencies, 37 export promotion councils, and 500 certifications—leads to further complex regulations.[43] The increasing sustainability regulations and Quality Control Orders (QCOs), such as the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) and Corporate Sustainability Due Diligence, lead to higher impediments and costs.[44] Table 6 shows the several regulatory and policy challenges faced by Indian MSMEs in select sectors in GVC integration.
The PM Gati Shakti–National Master Plan for Multi-Modal Connectivity aims to address some of these challenges by enabling interdepartmental synchronisation, using data-backed analytical tools, and utilising the Unified Logistics Interface Platform (ULIP).
Table 6: Hurdles Faced by Indian MSMEs in GVC Integration
| Sector | MSME Contribution | Main Hurdles |
| Engineering Goods | Auto components, machinery, fabrication | Import-sensitive sector, increasing sustainability regulations (EU’s CBAM for iron and steel)[45] |
| Gems and Jewellery | Cutting and polishing | High certification and documentation costs; sustainability laws, high compliance costs, increasing input costs (sanctions on Russian-origin diamonds)[46] |
| Ready-made Garments | Vendor to global brands | Environmental, Social, and Governance (ESG) standards, high QCO requirements (EU’s Corporate Sustainability Due Diligence)[47] |
| Chemicals | Dyes, pigments, and agrochemicals | Rising input costs, high QCO requirements |
| Rice | Processing and milling | Volatile duties, high logistics cost |
Source: Authors’ own.
Despite multiple initiatives, delays and inefficient implementation persist due to lack of coordination between central, state, and local institutions. The absence of information and a single-window clearance system add to this. Several subjects, such as land and electricity, fall under the state’s purview, therefore weak Centre–state coordination leads to delays and structural gaps. Different labour, land, and permit policies across various states and jurisdictions lead to duplicate efforts and high costs.
Additionally, participation of MSMEs in flagship schemes, such as PLIs, remains low, with only 176 out of 764 approved beneficiaries being MSMEs.[48] Threshold investment levels and output-linked subsidies tend to benefit larger enterprises with established economies of scale. The high investment needed and incremental sales thresholds are deterrents for MSMEs due to their limited working capital, inadequate capital expenditure for qualifying thresholds, and inability to meet certification required for domestic value addition. Additionally, several labour-intensive MSME-heavy industries are currently outside the PLI ambit.
Despite being labour intensive, Indian MSMEs face a shortage of skilled labour and advanced Industry 4.0-oriented skilling,[d] including in high-growth sectors such as textiles, automobiles, solar power, retail, and agriculture. This lowers productivity. Indian MSMEs tend to hire locally and not provide the required training, due to high attrition rates.[49] The World Bank Enterprise Survey for India indicated that just 7.7 percent of firms in total offered formal training to workers, with merely 5.8 percent of small firms and 14.1 percent of medium firms.[50] Limited awareness about central- and state-led initiatives leads to MSMEs losing out on existing skill-development schemes. A NITI Aayog survey indicated that 40 percent of correspondents from MSMEs could not name even one government skill-development scheme.[51]
This section outlines a scheme to improve formalisation, export orientation, sustainable measures adoption, and competitiveness of MSMEs registered under Udhyam in the manufacturing sector. It takes into consideration the high-investment thresholds for existing outcome-based incentives, such as the PLI scheme. It suggests an alternate approach to make the incentive more inclusive without any capital expenditure requirements (see Annexure 1 summarising the present PLI schemes across sectors and eligibility criteria). By considering Gross Value Addition, it focuses on deeper integration of MSMEs into supply chains rather than mere incremental sales. It also integrates price elasticity, such that goods that are highly price sensitive can be incentivised further to raise volumes, cushion against GVC disruption, and diversify exports. The scheme proposes green production and a sustainability-centric approach to meet the baseline requirements for global market participation, such as the CBAM and the EU Deforestation Regulation.
The principles below will ensure coherence, accountability, and forward alignment with India’s trade and development priorities:
Outcome-based Incentivisation
Incentives should be linked to incremental performance metrics, such as production growth, export turnover, and technology adoption, rather than input subsidies. This will enhance efficiency and transparency while rewarding competitive behaviour.
Sectoral Differentiation
Priority tradeable sectors where India holds a comparative advantage (e.g., engineering goods, agro-processing, textiles, chemicals, leather, and electronics) should be targeted. This ensures that industries with high potential for export scalability and job creation benefit.
Fiscal Sustainability and Sunset Clauses
Each incentive window should operate within a defined tenure (five to seven years) with a gradual tapering mechanism and periodic review. This guards against fiscal overextension and entrenched dependency.
Compliance with WTO Norms
The incentive design should employ production-linked mechanisms, cost-reimbursement for market access, and technology support consistent with the Agreement on Subsidies and Countervailing Measures (ASCM), and avoid explicit export-contingent subsidies.
Technological and Environmental Alignment
Green production and circular economy practices should be integrated within the incentive structure to align with emerging sustainability norms and access ESG-conscious global markets.
Zero Defect, Zero Effect (ZED) Alignment
Reinforcing the ‘Zero Defect’ policy will align incentives to outcomes such as lower rejection rates, improved on-time delivery, and stronger adherence to global standards. This will directly strengthen export readiness, reduce the cost of poor quality, and build trust with large buyers and GVCs.
Figure 6: Guiding Principles for PEOIS
| 01 Outcome-Based Incentivisation Incentives contingent on incremental performance metrics: production growth, export turnover, and technology adoption, rather than input subsidies. Rewards competitive behaviour and enhances transparency. | 02 Sectoral Differentiation Identifies priority tradeable sectors with comparative advantage: engineering goods, agro-processing, textiles, chemicals, leather, and electronics. Targets industries with high export scalability and job creation. |
| 03 Fiscal Sustainability and Sunset Clauses Each incentive window operates within a defined tenure of five to seven years with gradual tapering and periodic review. Guards against fiscal overextension and entrenched dependency on support. | 04 Compliance with WTO Norms Avoids export-contingent subsidies. Employs production-linked mechanisms and cost-reimbursement for market access, fully consistent with the ASCM. |
| 05 Technological and Environmental Alignment Green production and circular economy practices integrated within the incentive structure enable MSMEs to align with sustainability norms and access ESG-conscious global markets. | 06 Zero Defect, Zero Effect (ZED) Alignment Aligns incentives to outcomes such as lower rejection rates, improved on-time delivery, and global standards adherence, strengthening export readiness and building trust in GVCs. |
Source: Authors’ own.
PLI–MSME Variant
This core incentive is 4–6 percent on incremental production over a base year for up to five years, disbursed via Direct Benefit Transfer (DBT) linked to verified production data. Registered entities under Udyam and GST with audited accounts, meeting minimum investment thresholds and demonstrating export/import substitution potential, should be eligible. Sectors such as light engineering, electrical equipment, processed foods, textiles, auto components, chemicals, and electronics should be prioritised.
Export Facilitation Grant (EFG)
An EFG can help reduce transaction costs for MSME exporters, covering logistics, quality certification, and packaging costs (up to 3 percent of Freight on Board [FOB] value). It will also offer partial support for international marketing and Business-to-Business (B2B) platforms, integrating with the India Brand Equity Foundation (IBEF).
Green and Sustainable Production Incentive (GPI)
This will encourage adoption of cleaner technologies and energy efficiency. It can include interest subvention (2–3 percent) for loans for low-carbon technology upgrades, a one-time capital subsidy for renewable energy installations, and a carbon-credit-linked incentive for verified emission reductions.
ZED-I
This will incentivise improvements in quality, productivity and resource efficiency. A ZED ‘performance index’ can be utilised to aggregate return rates, compliance with buyer specifications, defect rates, on-time delivery, green labelling, and determining the payout tier.
This PEOIS has been strategically designed to avoid classification as a prohibited subsidy under the ASCM. First, the PLI is contingent upon incremental output volume and value addition, not the export destination, thus avoiding a direct linkage to export performance, which is prohibited under Article 3 of the ASCM.[52] Second, the proposed EFG reimburses specific transaction costs (logistics, certification) and does not subsidise price, drawing it away from the ‘serious prejudice’ clause under Article 6 of the ASCM.[53] Third, the GPI supports technology upgrades and environmental compliance, aligning with principles of subsidies for public good objectives in compliance with Article 8 (Non-Actionable Subsidies).[54]
Financing should be done through a consolidated MSME Development Fund that draws from Central budgetary allocations under the MoMSME and commerce ministry; through state-matching contributions for infrastructure and facilitation; through multilateral or bilateral credit lines from development partners (such as the World Bank and the Asian Development Bank); and corporate social responsibility (CSR) and cluster-development co-funding. Outcome-based disbursement and digital monitoring will enforce fiscal sustainability and limit moral hazard and redundancy.
Governance should be decentralised with strong national oversight. At the national level, an Inter-Ministerial Coordination Committee consisting of the ministries of MSME, commerce, and finance; the Department for Promotion of Industry and Internal Trade (DPIIT); and the NITI Aayog can coordinate the policy design, sectoral prioritisation, and funding approvals. At the state level, State MSME Export Facilitation Cells can oversee implementation, monitoring, and liaison with clusters. At the district levels, District MSME Export Hubs under DC-MSME can help with awareness, capacity building, and beneficiary verification. A Public–Private Partnership platform with industry bodies (e.g., the Federation of Indian Export Organisation, Confederation of Indian Industry, Federation of Indian Micro and Small and Medium Enterprises, The Associated Chambers of Commerce and Industry of India) can be organised for validation, training, and third-party certification, along with national/state-level awareness campaigns in vernacular languages, collaboration with chambers/universities for training and technical support, and a Knowledge Platform for peer learning and policy feedback. Cluster-Based Deployment can prioritise MSME Export Clusters based on export potential and infrastructure readiness, integrating with the existing Cluster Development Programme (CDP) to avoid duplication and increase efficiency.
Effective implementation is pivotal for credibility and impact. Therefore, for better implementation, a phased roll-out is proposed. This can have three phases, with the first being the pilot, the second scaling up on the basis of performance, and the third involving consolidation.
A Digital Monitoring Dashboard under DGFT–MSME will track production, exports, and employment in real time.52 This integrates with the Goods and Services Tax Network (GSTN) and Udyam databases for automated validation. Third-party audits by reputed agencies will be done every 18 months. Evaluation will be based on measurable outcomes. An indicative list of indicators for measuring performance is given in Table 7.
Table 7: Metrics and Indicators for MSMEs
| Metric | Indicator |
| Production Performance | Incremental production volume and value |
| Export Competitiveness | Export turnover, diversification of markets, and quality control |
| Employment Impact | Net job creation in beneficiary MSMEs |
| Sustainable Production | Number of units adopting digital initiatives |
| Fiscal Efficiency | Cost-benefit ratio and leakages |
Source: Authors’ own.
The proposed rate calculator measures beyond conventional incremental-sales benchmarks by incorporating indicators of production, competitiveness, and technological efficiency. It uses the Gross Value Added (GVA) percentage share of six exported products to capture production performance beyond sales growth, including domestic value creation. It integrates price elasticity of the select exported goods as a measure of export competitiveness. Sectors that are more responsive to global demand (such as gems and jewellery, food products, or leather) are given greater weightage, reflecting their greater potential for foreign-exchange earnings and external market integration. It also encourages diversification towards more competitive product lines. Sustainable production parameters measure adoption of cleaner technologies and energy-efficient practices.
The base incentive rate ranges from 4 to 6 percent for medium to micro enterprises, with higher rates for micro and small units compared to medium-sized firms, to counter their higher capital constraints.
A. Rate Calculator:
B. Total Incentive (TI) = Rate x Incremental eligible sales; R = Base Rate (Bri, i = 1, 2, 3[e]) + Ra + Rb + Rc + Rd … (A)
*No minimum cap on capital expenditure (capex)
C. Calculations for Rate in Key Categories
Elasticity classification for absolute value of elasticity: High (> 0.70); Medium (0.30 – 0.70); Low (<0.30)
Table 8: Price Elasticity of Demand for Exported Goods and GVA Share for India
| Commodity | Price Elasticity of Demand Value | Elasticity Classification* | GVA Share (%) |
| Engineering Goods and Electronic Goods | -0.56 | Medium | 4.7 |
| Gems and Jewellery | -0.92 | High | 2.5 |
| Textile and Products | -0.29 | Low | 1.9 (inclusive of leather) |
| Food Products (Agri) | -0.71 | High | 1.5 |
| Organic and Inorganic Chemicals | -0.23 | Low | 1.4 |
| Leather | -0.88 | High | 1.9 (inclusive of textiles) |
Source: UNCTAD Report on Impact of Global Slowdown on India’s Exports and Employment; [55] NCAER,[56] MoSPI,[57] Department of Chemicals.[58]
Tables 9 and 10 present two scenarios for the maximum and minimum PLIs for the above industries.
| Sector | Base (Br1) | GVA (Ra) | Sustainable Practices (Rb) | Elasticity (Rc) | ZED KPIs (Rd) | PLI |
| Engineering Goods and Electronics | 6 | 5 | 3 | 0 | 3 | 17 |
| Gems and Jewellery | 6 | 5 | 3 | 5 | 3 | 22 |
| Textile and Products | 6 | 0 | 3 | 0 | 3 | 12 |
| Food Products (Agri) | 6 | 0 | 3 | 5 | 3 | 17 |
| Organic and Inorganic Chemicals | 6 | 0 | 3 | 0 | 3 | 12 |
| Leather | 6 | 0 | 3 | 5 | 3 | 17 |
| Sector | Base % | Rate for GVA (Ra) | Sustainable Practices (Rb) | Rate for Elasticity (Rc) | ZED KPIs (Rd) | By Commodity |
| Engineering Goods and Electronics | 6 | 5 | 0 | 0 | 0 | 11 |
| Gems and Jewellery | 6 | 5 | 0 | 5 | 0 | 16 |
| Textile and products | 6 | 0 | 0 | 0 | 0 | 6 |
| Food Products (Agri) | 6 | 0 | 0 | 5 | 0 | 11 |
| Organic and Inorganic Chemicals | 6 | 0 | 0 | 0 | 0 | 6 |
| Leather | 6 | 0 | 0 | 5 | 0 | 11 |
In other words, for a ‘micro’ enterprise producing engineering goods that adheres to the sustainable production mandate and is within the ZED verified index, the incentive range is 11–17 percent. Therefore, the maximum and the minimum total incentive for year (t) will be:
TImax = 17% x (Yt – Yt-1) … (2)
TImin = 11% x (Yt – Yt-1) … (3)
Where Yt refers to the gross value of sales in year t
Yt-1 refers to the gross value of sales in year t-1
MSMEs are central to India’s economy policy; however, several gaps need to be addressed through a structured and coordinated policy framework. Resolving them will lead to ease of regulation, access to resources such as affordable credit, linkages with start-ups and universities for capacity building, automation and access to market linkages, credit enhancement, and risk mitigation. These are input-side enabling factors, not performance rewards, and should be applied across the board. If an MSME or a cluster is in a remote area, it should receive additional support, such as freight subsidies, capital subsidies, higher working capital limits, improved physical infrastructure, and certification assistance. The PEOIS should be administered on a level playing field through factor market facilitation and input subsidies.
Figure 7: MSME Policy Recommendations Framework
Source: Authors’ own.
MSMEs require stable and diversified market access for better integration into and risk management of value chains. Indian government public procurement portals, such as the Government e-Marketplace (GeM) and Open Network for Digital Commerce (ONDC), support this objective. The government policy mandates the procurement of up to 25 percent of the total annual purchases of central ministries, public sector undertakings (PSUs), and other departments from MSMEs. In FY24, total procurement from MSMEs amounted to 43.66 percent. Similarly, ONDC aims to scale up networks for MSMEs and reduce customer-acquisition cost.
While ONDC and GeM portals aim to provide end-to-end solutions, their implementation remains limited due to several challenges such as delayed payments, uneven user experience, and information asymmetry.[59] Only 10.2 lakh MSMEs out of 6.43 crore are registered on the GeM portal, while ONDC retail orders have been gradually declining as well.[60] Evidentially, retail transactions on ONDC have fallen from 6.5 million orders in 2024 to 4.6 million in 2025.[61]
To make public procurement processes more MSME-friendly, the GeM must digitise all processes, including automatic invoicing and payment. Financial rails must be connected to the platform instead of buyer entities, to avoid payment delays. The GeM’s coverage should be scaled beyond common use items to encompass public procurement for all public purchasing, on the lines of the Republic of Korea’s Online E-Procurement System (KONEPS) that engages with two-thirds of Korea’s public procurement.[62] The GeM must also integrate transparency at every level, from online advertising to publication of results.
Increasing MSME-friendly infrastructure capital expenditure can enable further integration into GVCs. Cluster-based efforts should be integrated into trade corridors as part of port–rail–road infrastructure, enabling faster transhipments. Trade corridors such as the India–Middle East–Europe Corridor (IMEC) can enable MSMEs to leverage multi-modal value chains. MSME parks for defence manufacturing are already being set up in Sanand and Khoraj in Gujarat by the Gujarat Industrial Development Cooperation (GIDC), which could also give them easy access to crucial IMEC-relevant ports, such as Mundra and Kandla. As seen in Figure 8, many MSME clusters are active in the Northeast. Integrating the region with the rest of the country through rail and road freight corridors is crucial to promote infrastructural connectivity.
While the broader PEOIS framework is outcome-based, a carefully scrutinised role for input-based subsidies remains necessary to support inclusivity and regional equity. Eligibility for the subsidies should be geographically and demographically limited, confined to aspirational districts, Tier-II/III locations, and certified women- or youth-led enterprises, to prevent leakage into mainstream industrial clusters. Subsidies should also be non-recurrent and disbursed on a limited basis within the first two years of participation, with a mandatory transition to outcome-based incentives thereafter.
It is also necessary to provide MSMEs with shared infrastructure to reduce the disproportionately high costs for certifications and testing to meet compliance requirements. Cluster-level infrastructure in the form of shared labs and testing facilities can be set up to reduce per-unit costs and increase certification-grant approval timelines. For carbon-intensive sectors, industrial clusters can provide shared services such as group power purchasing agreements (PPAs) for renewable energy, energy audits, and green logistics infrastructure. To combat rising carbon taxation costs, the government can provide incentives for decarbonisation in the form of tax-linked incentives and blended and low-cost finance. They can help standardise emission accounting and carbon tracking across supply chains to meet global market guidelines.
Figure 8: MSE-CDP Active Clusters and Major Ports, by State
Source: Authors’ own.
Currently, MSMEs are entitled to certain concessional tax rates to make regulatory compliance easier. Under the new tax regime, they can pay 22 percent tax (as opposed to 25 percent under the old regime) if they forego some incentives.[63] To enable capital formation and automation, MSMEs that invest in new plant and machinery can claim additional depreciation to accelerate cost recovery. Innovation-based tax incentives can enable Indian MSMEs to adopt global best practices, following the international examples of the Enterprise Innovation Scheme of Singapore that allows greater deductions up to 400 percent for research and development (R&D), intellectual property (IP) registrations and acquisitions, training expenditure, and qualifying innovation;[64] or Japan’s Digital Transformation Investment Promotion scheme that provides 3–5 percent tax credit or 30 percent special depreciation for enterprises adopting plant automation, e-commerce automated warehouses, and software.[65]
Scaling up MSME financing to meet the credit gap, especially to improve their access to working capital, is necessary. This is already being undertaken through credit guarantee schemes, priority lending programmes, and securitisation of MSME lending portfolios, and can be bolstered through tailored lending and innovative financing mechanisms, such as digital payments, insurance, leasing, and risk-management products. This can be done through blended finance, for instance, via impact bonds,[f] in which private investors can fund MSMEs based on outcomes such as skilling, digitisation, and market access, and public institutions can repay them if these outcomes are achieved.
Specific funds can be allocated for innovation. For example, Lebanon’s Innovative Small and Medium Enterprises (iSME) project, with an overlay of US$30 million investment, provides equity co-investments to innovative enterprises in addition to grant funding. This not only enables enterprises to crowd-in finance from the private sector but expands market access as well.[66]
Increased digitisation processes through the Account Aggregator model and Unified Lending Interface (ULI) enable lenders to assess credit worthiness and tailor credit products for enterprises based on actual cash flows through real-time data from bank accounts and the Goods and Services Tax Network.[67] The ULI also enables data-driven, quickly dispersible, and low-cost credit to MSMEs. Consent-based data will help assess creditworthiness and reduce appraisal time and manual verifications. It will also allow MSMEs to access multiple lenders together, minimizing the risk of duplication and fraud.
While digitisation improves MSMEs’ resilience and market access, the adoption remains low. With increasing global competitiveness, it is important to scale up skilling and capacity building. In FY24, 65 percent of Indian MSMEs utilised digital technology for their daily operations and only 29 percent used accounting software for managing their business.[68] About 68 percent of MSMEs showed growth after adopting digitised processes.
Digitised processes such as electronic invoicing reduce compliance and regulatory audit complexities.[69] Artificial intelligence (AI) can accelerate MSME processes such as payroll, invoicing, consumer assistance, credit solutions, supply chain logistics, and quality control, and optimise energy efficiency. Around 94 percent of MSMEs acknowledged the benefits of AI in driving their business, but 65 percent of them are still not aware of the appropriate tools to leverage the benefits, indicating a need to upskill and improve digital literacy.[70] Additionally, 59 percent say that the usage of AI would lead to budgetary constraints.
Figure 9: Potential Uses of AI to Accelerate MSME Processes
Source: Authors’ own.
Clusters can be used to provide specific skill training in sectors such as food processing, toys, garments, and electronics. Skill certifications can be integrated with the ‘Skill India Programme’ in the form of diplomas. Centres of Excellence can be built in partnership with the private sector to create simulation-training labs and skilling programmes to onboard and utilise e-commerce platforms for MSMEs. Central schemes such as the Employment Linked Incentive can incentivise enterprises to train and retain employees. For instance, Singapore uses the ‘Skill Future Enterprise Credit’ scheme to offer credit to MSMEs, which offsets about 90 percent of their training expenditure aimed towards workforce transformation.[71] An Observer Research Foundation–Pricewaterhouse Coopers report identified concrete opportunities for MSMEs to adopt AI solutions that are affordable, actionable, and accessible, enabling deeper and more effective integration into GVCs.[72]
To make credit affordable, the following measures can be undertaken: enhanced guarantee coverage (up to 85 percent) for export-linked working capital loans, rebates on forward cover premiums, the creation of an Export Credit Enhancement Facility, and the introduction of Working Capital Insurance to mitigate payment and foreign exchange risks.
MSMEs located in remote, aspirational, or geographically disadvantaged regions require a differentiated subsidy architecture to achieve the efficiency levels required to access the PEOIS and integrate into national- and global-value chains. This can be in the form of:
All these should be time-bound with offset clauses to prevent long-term dependency.
India’s MSME policy has historically oscillated between protection and promotion. The present imperative is transformation: to move from survivalist protectionism to competitive productivity. The proposed PEOIS seeks to catalyse this transition.
By aligning MSME incentives with performance, sustainability, and market integration, the scheme redefines the state’s role from a provider of subsidies to an enabler of competitiveness. It positions MSMEs as partners in India’s industrial and export expansion rather than peripheral beneficiaries of welfare policy.
The broader philosophical underpinning of this scheme lies in inclusive competitiveness, the notion that inclusivity need not be antithetical to efficiency. When MSMEs are provided with market-linked incentives, technological tools, and institutional support, they can internalise competitiveness as a behavioural norm rather than see it as an externally imposed condition.
The envisioned framework thus bridges India’s twin policy ambitions:
Thus, the scheme contributes to the transformation of India’s industrial landscape from a fragmented ecosystem of small producers to a networked economy of globally competitive enterprises.
The input or factor side also needs to be addressed. Given that the sector has been languishing for a long time and needs a big push, this is crucial. While government initiatives so far have concentrated on factor-side subsidies with a view towards equity, this paper, for the first time, proposes a performance-based incentive scheme, working alongside enhanced input-side subsidies.
The PEOIS must not be viewed merely as a fiscal instrument, but as a strategic policy lever to accelerate structural transformation, linking entrepreneurship, technology, and sustainability. If designed and implemented with discipline, transparency, and foresight, it could anchor India’s next phase of industrial growth, one that is simultaneously inclusive, productive, and globally engaged.
This Annexure consolidates the publicly available guidelines and eligibility thresholds for the 14 sectors covered under India’s PLI scheme (as on 23 October 2025). Each entry includes indicative investment commitments and direct links to the official annexures or guideline documents.
Global/Hybrid/Domestic categories with investment by year and sales thresholds over six years. Global: INR 500 crore; Hybrid: INR 250 crore; Domestic: INR 20 crore cumulative over six years.
Official annexure/guidelines: https://www.meity.gov.in/pli-it-hardware-2
Incentive on incremental sales of mobiles and components. For example: mobile phones (≥INR 15,000 invoice value) require ≥INR 250 crore cumulative investment to qualify.
Official annexure/guidelines: https://www.meity.gov.in/pli-scheme
Minimum investment threshold: MSMEs – INR 10 crore; Others – INR 100 crore (excluding land and building).
Official annexure/guidelines: https://dot.gov.in/pli-scheme
Champion OEM: turnover ≥INR 10,000 crore & investment ≥INR 3,000 crore; Component Champion: turnover ≥INR 500 crore & investment ≥INR 150 crore.
Official annexure/guidelines: https://heavyindustries.gov.in/pli-auto
Mandatory investment INR 225 crore per GWh within two years; minimum committed capacity 5 GWh.
Official annexure/guidelines: https://heavyindustries.gov.in/pli-acc-battery
Bid-based selection; no fixed threshold; bidders commit capacity and integration level; PLI tied to INR /Wp and local value addition.
Official annexure/guidelines: https://mnre.gov.in/production-linked-incentive-pli
Sub-category specific thresholds; compressors and key AC parts range INR 100–300 crore as per DPIIT Guidelines (2021, amended 2025).
Official annexure/guidelines: https://dpiit.gov.in/whitegoods-pli
Original: Part 1 INR 300 crore investment & INR 600 crore turnover; Part 2 INR 100 crore investment and INR 200 crore turnover. Revised (2025): INR 150 crore / INR 50 crore respectively.
Official Annexure/Guidelines: https://textilescommittee.nic.in/pli-scheme
Category I thresholds INR 23–100 crore investment with INR 150–500 crore turnover; Category II (SMEs) based on sales only.
Official Annexure/Guidelines: https://mofpi.gov.in/pli-scheme
Category-wise investment and sales thresholds; variable by product category as per Department of Pharmaceuticals annexures.
Official Annexure/Guidelines: https://pharmaceuticals.gov.in/pli-scheme-pharma
Revised scheme (2020): committed investment and minimum annual production capacity per product type.
Official Annexure/Guidelines: https://pharmaceuticals.gov.in/pli-bulkdrugs
Categories A and B; committed investment and annual threshold sales; net worth must be ≥30percent of committed investment.
Official Annexure/Guidelines: https://pharmaceuticals.gov.in/pli-medicaldevices
Sub-category thresholds (e.g., Galvanneal/GI-Auto-Gr: INR 700 crore, 0.4 MTPA capacity; Tin mill: INR 600 crore).
Official Annexure/Guidelines: https://steel.gov.in/pli-specialtysteel
20percent PLI on value addition; minimum 40percent local value addition; MSME thresholds: INR 2 crore for drones, INR 0.5 crore for components.
Official Annexure/Guidelines: https://civilaviation.gov.in/pli-drones
Nilanjan Ghosh is Vice President, Development Studies and Kolkata Chapter, Observer Research Foundation.
Shruti Jain is Associate Fellow, Development Studies, Observer Research Foundation.
All views expressed in this publication are solely those of the authors, and do not represent the Observer Research Foundation, either in its entirety or its officials and personnel.
[a] Receivable financing or invoice financing is a financing mechanism where the business sells its accounts receivables or unpaid invoices to a third-party financial institution at a discount to meet its working capital needs.
[b] As of April 2026, the Reserve Bank of India (RBI) has kept the policy repo rate at 5.25 percent.
[c] The Trade Receivables Discounting System (TReDS) is an RBI-regulated online platform in India for MSMEs to discount invoices and convert receivables into cash immediately, thus improving their liquidity.
[d] Industry 4.0 refers to the integration of digital technologies such as artificial intelligence (AI), internet of things (IoT), and automation into manufacturing and production processes to create smart, interconnected, and highly efficient industries for productivity enhancement.
[e] 1 refers to micro enterprises, 2 refers to small enterprises, and 3 refers to medium enterprises.
[f] An impact bond is a results-based financing mechanism in which private investors fund social or development programmes upfront, and outcome funders (usually governments or donors) repay the investment, often with a return, only if pre-agreed outcomes are achieved.
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[71] SkillsFuture Singapore, “SkillsFuture Enterprise Credit (SFEC) Funding Programme,” https://skillsfuture.gobusiness.gov.sg/support-and-programmes/funding/skillsfuture-enterprise-credit-sfec.
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[73] Compiled by the authors from various sources: PIB, MeitY, MoFPI, DoP, MNRE, DPIIT, MHI, MOCA, and other ministries.
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Dr Nilanjan Ghosh heads Development Studies at the Observer Research Foundation (ORF) and serves as the operational and executive head of ORF’s Kolkata Centre. He ...
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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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