India faces a critical moment as new tariffs threaten key export sectors. Nearly half of India’s exports to the United States come from micro, small, and medium enterprises (MSMEs) in textiles, seafood, and gems. These tariffs could severely impact firms with low margins, especially in hubs like Surat and Tiruppur. Yet, beyond this immediate crisis lies a vast untapped potential within India’s MSME sector that could reshape the country’s role in global supply chains.
Current Export Challenges for MSMEs
Recent tariffs impose duties as high as 50 per cent on key Indian exports. This puts pressure on MSMEs, which form the backbone of export clusters. Despite growth in exporting firms, only about 0.24 per cent of the 73 million MSMEs currently export. Nearly half of India’s exports are generated by this tiny fraction. The majority of MSMEs remain focused on the domestic market or operate informally, limiting their global reach.
Global Supply Chain Shifts and India’s Opportunity
Multinational companies are diversifying supply sources due to geopolitical tensions, pandemic effects, and rising costs. This China+1 strategy seeks resilient and de-risked supply chains. India’s challenge is to convert its vast MSME base into reliable global suppliers. Doing so requires overcoming gaps in technology, scale, and governance that currently constrain most micro enterprises.
Barriers to MSME Integration in Global Value Chains
Many MSMEs lack certifications like ISO and CE marking. They struggle with complex inventory models such as just-in-time and lean manufacturing. Digital integration and Industry 4.0 tools are also limited. These constraints confine export growth to a small number of mid-sized firms with adequate resources. The rest remain excluded from global value chains (GVCs).
Financial and Regulatory Reforms Needed
Access to finance is the biggest hurdle. MSMEs face a credit shortfall estimated at around ₹30 trillion. Micro firms are hit hardest. Funding is needed for technology upgrades, certification, and digital tools. Policies must promote fintech credit solutions using GST and Udyam data for AI-driven scoring. Cluster financing with government-backed funds could offer competitive rates linked to export potential. Simplified compliance and digital governance are essential to reduce regulatory burdens on smaller firms.
Logistics and Infrastructure Challenges
India’s overall logistics costs are competitive at 7.97 per cent of GDP but small firms pay nearly 17 per cent of their output on logistics. This cost gap undermines competitiveness. Accelerating the PM Gati Shakti National Master Plan to develop multimodal logistics parks will reduce costs through shared warehousing and efficient connectivity. Mandating the Unified Logistics Interface Platform for MSME cargo can ensure paperless, low-cost tracking aligned with GVC needs.
Skill Development and Quality Assurance
Technology adoption requires skilled labour. Vocational training must focus on quality assurance, digital operations, machine maintenance, and supply chain management. Establishing shared testing and certification centres in clusters will spread costs and build buyer trust. These steps are vital for MSMEs to meet international standards and integrate into global supply chains.
Strategic Imperative for India
The global shift in supply chains presents a narrow window for India. Empowering the 99.76 per cent of MSMEs not yet in export markets is crucial. Failure to act swiftly risks losing ground to competitors like Vietnam, Mexico, and Indonesia. India’s path to becoming a manufacturing powerhouse depends on targeted reforms and large-scale execution.
Questions for UPSC:
- Discuss in the light of India’s economic growth how micro, small, and medium enterprises contribute to export-led development and the challenges they face.
- Critically examine the impact of global value chain diversification on emerging economies with examples from India and Southeast Asia.
- Explain the role of financial technology (FinTech) in enhancing credit accessibility for small enterprises and its implications for economic formalisation.
- With suitable examples, discuss the importance of logistics infrastructure and skill development in integrating small firms into global supply chains.
