E-Paper
Why MSMEs are the real test of Budget 2026
This article is authored by Vikesh Sharma and Rajat Mehrotra.
India’s aspiration to become a top-tier economy will not be realised through megaprojects, corporate balance sheets or headline GDP growth alone. It will be shaped in the millions of small factories, workshops, service units and trading firms that together form the MSME sector. These enterprises account for roughly 31% of GDP, contribute over 35% of manufacturing output and 48% of exports, and employ about 33 crore people. In sheer scale, MSMEs are not a marginal segment; they are the economy’s core transmission mechanism. Yet, the sector remains structurally fragile. Tighter bank credit, a hike in input costs, and late payment can halt an entire production overnight. This is not just a sectoral issue; it is a macroeconomic risk in the current global economic uncertainty.
The question Budget 2026 must answer is simple but decisive: Does it genuinely reduce the stress points that keep MSMEs small and fragile, or does it merely repackage familiar promises? The Economic Survey 2026 has underlined the macroeconomic picture. It projects economic growth of 6.8% to 7.2%, being cautious about global trade disruption, energy volatility, and geopolitical tensions, which could hurt exports and financial flows. This is precisely the environment in which MSMEs suffer first and recover last. Unlike large firms, they do not have deep cash buffers or diversified markets. If the survey’s warning is taken seriously, strengthening MSMEs becomes a more macroeconomic strategy instead of a social objective.
Relief for MSMEs must be understood in three dimensions: cash flow, compliance burden, and capability. If Budget 2026 delivers on these three, it can credibly claim to be helping the country achieve a better economy. If it fails, growth will remain concentrated and vulnerable. The first and most urgent issue is cash flow. MSMEs rarely fail because of a lack of ideas or markets; they fail when liquidity dries up. Working capital cycles are long, payment discipline is weak, and borrowing is often expensive. Even today, a significant share of MSMEs depend on informal credit at double-digit interest rates. The survey recognises that guaranteed credit remains a critical tool for reducing lenders’ risk aversions. Expanding the scope of credit guarantees and improving digital credit assessment can potentially lower collateral dependence and widen access to formal finance. But credit volume alone is not a relief. What matters is speed, predictability and price. A loan sanctioned after three months cannot save a business with a 30-day payment cycle. Cash flow-based lending, invoice discounting and integration with digital transaction data must become mainstream rather than pilot experiments.
The second constraint is compliance friction. India has made genuine progress in formalisation, but for MSMEs, the compliance burden still functions like an invisible tax. Multiple portals, overlapping fillings, and delayed refunds absorb managerial time and trap working capital. Each additional form ruins productive hours for the firms. Even small improvements in compliance efficiency can have a greater collective impact. Saving a few hours a month on filings and follow-ups of each MSME can have productive gains of millions of workdays nationally. Therefore, relief will be real only when MSMEs experience shorter turnaround times, transparent rejection criteria, stable interest costs, fewer overlapping regulations, a simplified return structure, and faster GST refunds, along with lower taxes. The deeper reform lies in considering MSME credit as financial infrastructure rather than a discretionary aid.
The third and most strategic dimension is capability. A top economy is not defined by the number of small firms but by their productivity, quality and export readiness.
India can't be a manufacturing and exports hub if millions of MSMEs stay stuck in low-value work with weak logistics and outdated machinery. The Economic Survey rightly pointed out that maintaining high growth necessitates continuous productive improvement. For MSMEs, this means access to efficient technology, quality infrastructure and skills. In this case, support based on clusters becomes very important. Shared testing facilities, tool rooms, design centres, and skill hubs can make it much cheaper to upgrade small units. A single CNC machine or quality lab is unaffordable for an individual micro firm, but viable at the cluster level.
Market access is equally important. MSMEs face structural disadvantages in exports: Certification costs, logistics bottlenecks and limited trade finance. If India’s export strategy is to broaden beyond a few large players, small firms must be enabled to meet international standards and delivery schedules. MSMEs can become export partners instead of just surviving on thin margins if they have better infrastructure, digital export platforms, and simplified trade procedures. There is also a larger macro-fiscal story at play. Budget 2026 rightly continues to place capital expenditure at the centre of the growth strategy. Every rupee spent on infrastructure sets off a chain reaction—raising demand for cement, steel, transport, electrical equipment and a host of services—sectors in which MSMEs are deeply embedded. This multiplier effect functions only when small firms are financially healthy enough to participate. A stressed firm cannot bid for contracts or expand output, regardless of how much public spending is announced. Therefore, relief for MSMEs is a precondition for their success. Employment adds a further layer of urgency. MSMEs are India’s largest source of non-farm jobs after agriculture. Weak MSMEs mean insecure livelihoods, rising informality and widening inequality. So, India cannot be built on growth that excludes its largest employers.
Budget 2026’s MSME agenda must therefore be evaluated not only in terms of output growth but in terms of job stability and income security. The goal should be graduation, not dependence: helping micro firms become small, small firms become medium, and medium firms integrate into larger value chains. Support must be transitional and productivity-linked. Otherwise, the fiscal burden rises while competitiveness stagnates. The policy direction suggests an attempt to improve credit flow, reduce compliance friction and promote productivity. This is a shift from rhetoric to structure. But the real test lies in execution. Relief will not be visible in announcements; it will be visible in balance sheets: lower borrowing costs, quicker refunds, and rising investment in machinery and skills.
The Economic Survey cautions that global uncertainty is likely to endure. In such conditions, domestic resilience becomes the first line of defence. MSMEs offer exactly that resilience. They decentralise production, distribute income and sustain local demand. When they are financially strong, the economy absorbs shocks. When they are weak, every external tremor becomes a domestic crisis. Budget 2026, therefore, faces a critical test. If it reduces credit costs, simplifies compliance, and strengthens capability, it can transform MSMEs from a struggling sector into a strategic growth engine. If it settles for incremental schemes without structural reform, MSMEs will continue to operate under familiar constraints, and India’s top-tier ambition will remain incomplete. India’s growth story will ultimately be judged not by the rise of a few corporate giants but by the capability of millions of small enterprises to grow, upgrade and compete.
This article is authored by Vikesh Sharma, assistant professor of economics, RV University, Bengaluru and Rajat Mehrotra, research scholar, corporate finance & dividend & energy policy, BITS Pilani, Rajasthan.
