India's small and micro businesses remain the backbone of the economy, contributing nearly one-third of GDP, over 35% of manufacturing output and almost half of total exports. However, FY26 has turned into a particularly challenging year for the MSME sector, battered by geopolitical uncertainty, disruptive tariff shocks from the US and rising domestic compliance costs.
As the Union Budget 2026-27 approaches, industry bodies representing MSMEs have flagged urgent concerns and placed a set of targeted demands before the government, warning that unresolved tax and credit bottlenecks could severely weaken the sector's growth momentum.
GST 2.0 Fallout: Lower Prices, Higher Pain for Manufacturers
The rollout of GST 2.0, which consolidated multiple tax slabs into 0%, 5% and 18%, with a 40% slab for sin and luxury goods, has created mixed outcomes for MSMEs. While consumers benefited from lower prices on several daily-use and aspirational products, manufacturers faced an unintended consequence, a widening inverted duty structure.
In many cases, raw materials are taxed at 18%, while finished goods attract only 5%, resulting in large amounts of working capital getting locked up as unutilised input tax credit.
The Federation of Indian Micro, Small and Medium Enterprises (FISME) has demanded a time-bound and automatic refund mechanism for such inverted duty structures. It has also suggested introducing a concessional 8% GST rate for products where inputs are taxed significantly higher than outputs and refunding GST paid on plant and machinery purchases by small units.
Call to Slash Compliance for Small Businesses
Compliance costs remain another pain point. According to the Global Trade Research Initiative (GTRI), a radical overhaul is needed to reduce the burden on small enterprises.
Citing GST data, GTRI noted that 84% of GST registrants have annual turnover below Rs 1.5 crore, yet contribute less than 7% of total GST collections. It has recommended raising the GST exemption limit to Rs 1.5 crore for both goods and services, effectively freeing nearly 99% of small businesses from routine GST compliance.
At current profit margins, this threshold translates to modest monthly earnings, much of which is absorbed by fixed and working capital costs, GTRI founder argued.
Trump Tariffs Hit MSME Exports Hard
Adding to domestic pressures, punitive US tariffs under President Donald Trump have dealt a heavy blow to India's export-oriented MSMEs. FISME estimates that sales in some segments have dropped by up to 60%, potentially leading to a 4% rise in NPAs within the sector.
To cushion exporters, FISME has proposed:
- 3-5% interest subvention on export credit
- Extension of the NPA classification period to 180 days
- An ECLGS-style additional loan facility of 20% of outstanding credit
Micro Enterprises Push for Easier Credit Access
The Association of Indian Entrepreneurs (AIE), representing gig workers, traders and micro entrepreneurs, has highlighted the acute credit squeeze faced by the smallest units.
Among its key demands:
- Collateral-free loans up to Rs 1 crore for micro enterprises
- Interest rates capped at 6-7%
- Automatic renewal of working capital limits for GST-compliant units
- Interest-free loans for import substitution development
- Dedicated micro-sector lending targets for SIDBI and public sector banks
Under existing norms, enterprises with up to 10 employees and turnover of Rs 5 crore qualify as micro units.
Export Risk Shield and Market Access Demands
Echoing FISME, AIE has sought an Export Risk Equalisation Fund to compensate micro exporters impacted by sudden tariff hikes, along with temporary duty drawback enhancements and interest relief during tariff shocks.
Beyond exports, limited market access remains a structural challenge. AIE has called for:
- Mandatory 30% government procurement from micro enterprises
- Government payment of EPF and ESI contributions for three years for new jobs created
- Full reimbursement of apprenticeship training costs
Concerns Over Quality Control Orders
FISME has also raised red flags over the recent surge in Quality Control Orders (QCOs), warning that nearly half apply to inputs and intermediate goods, disrupting domestic supply chains and exports.
The federation has urged the government to suspend QCOs in sectors where domestic capacity is inadequate or where MSME competitiveness, jobs, and exports are adversely affected.
Budget 2026 Test for MSME Policy
As expectations build ahead of Budget 2026-27, MSME bodies are not seeking subsidies, but predictable policy, fair access to credit, simplified compliance and protection from external shocks. Whether the upcoming budget addresses these long-standing issues could determine the sector's resilience and its ability to continue driving India's economic growth.
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