Policy experts are calling for Budget 2026 to fundamentally reshape India's approach to Micro, Small and Medium Enterprise (MSME) development, advocating for comprehensive reforms that address structural constraints limiting the sector's growth potential. The recommendations focus on simplifying regulatory frameworks and enhancing credit access to enable MSMEs to scale and compete effectively in global markets.

MSME Sector's Economic Significance

MSMEs occupy a central position in India's economic landscape, demonstrating substantial contributions across multiple dimensions:

Despite this significant economic footprint, the sector continues to grapple with structural challenges that constrain its ability to scale and compete effectively.

Regulatory Compliance Challenges

Experts highlight that India's formalisation initiatives over the past decade, including GST implementation, digitised tax administration, and labour law consolidation, have strengthened transparency and expanded the tax base. However, these compliance frameworks have evolved around the operational scale and systems of larger enterprises, creating disproportionate burdens for smaller units.

For micro and small enterprises with limited financial and administrative capacity, regulatory compliance consumes a significantly higher share of resources compared to large corporations. This imbalance creates incentives for firms to remain below regulatory thresholds, discouraging formalisation and limiting growth potential.

Proposed Compliance Reforms

The experts recommend several specific measures to address compliance-related challenges:

GST Simplification Measures

• Implementation of quarterly GST return filing and tax payment as default for MSMEs up to higher turnover thresholds
• Lower interest rates for MSME tax payments
• Time-bound, automated refund mechanisms to address working capital constraints
• Extension of refund eligibility to GST paid on capital goods under inverted duty structures

Export Facilitation Improvements

• End-to-end digitisation of Foreign Trade Policy schemes including Advance Authorisation and EPCG
• Automatic licence closure upon fulfilment of export obligations
• Reduced discretionary processes to enable equal access for MSMEs and larger exporters

Dispute Resolution Enhancement

• Time-bound conclusion of disputes
• Reduced pre-deposit requirements for MSMEs
• Strengthened mechanisms to prevent prolonged litigation that locks up capital and management resources

Credit Access and Innovation Support

Recognising that regulatory simplification alone cannot address scale constraints, the experts emphasise the critical need for improved credit access, particularly given volatile global trade conditions. Recommended measures include:

• Interest subvention schemes
• Extension of NPA recognition norms
• Incremental credit lines under frameworks similar to the Emergency Credit Line Guarantee Scheme (ECLGS)

Technology and Innovation Focus

Drawing parallels with China's "Little Giants" programme, the experts suggest a calibrated approach for India focused on supporting high-potential MSMEs in technology-intensive sectors:

• Targeted support for enterprises in robotics, drones, defence manufacturing, and electronics
• Enhanced funding mechanisms for innovation and product development
• Expanded technology adoption financing beyond existing programmes like RAMP

Strategic Policy Shift Required

The experts argue that Budget 2026 represents a pivotal opportunity to transition from survival-focused MSME policies to frameworks that actively enable scale and competitiveness. Rather than introducing new schemes, the emphasis should be on simplifying existing regulatory interactions and ensuring access to patient capital.

The recommendations acknowledge the government's existing initiatives over the past decade, including ZED certification, credit guarantee schemes, and the RAMP programme, while calling for building upon this foundation through fundamental structural reforms that address everyday operational challenges faced by MSMEs in their growth journey.

The Indian government is launching a comprehensive digitisation initiative to modernise the country's 72 million micro, small and medium enterprises (MSMEs) through advanced technologies including sensors, artificial intelligence, and data analytics. The ambitious programme aims to help MSMEs meet increasingly stringent global compliance requirements and reduce export rejections by equipping them with essential digital factory tools such as machine monitoring systems, energy management solutions, and shop-floor software.

Pilot Programme Launch in Gujarat

The first pilot project will be implemented in Gujarat under the World Bank-backed Raising and Accelerating MSME Performance (RAMP) scheme, targeting 750 identified manufacturing units. The National Productivity Council (NPC) will oversee the implementation, focusing on capturing real-time information on machine performance, energy consumption, downtime, and maintenance requirements.

The initiative addresses a fundamental challenge faced by many MSMEs: limited visibility into shop floor operations, which often results in low productivity, high energy costs, inconsistent quality, and unplanned downtime. By digitising basic shop floor monitoring, the pilot aims to help unit owners identify hidden productivity losses, stabilise output, reduce energy wastage, and transition from reactive to planned maintenance strategies.

Technology Implementation Framework

The National Productivity Council will empanel startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) as technology providers. These startups will be responsible for installing and supporting a plug-and-play digital twin solution called the "Shopfloor Insight and Monitoring Kit" on one machine in each participating MSME unit.

The standardised design and subsidised deployment are intended to lower adoption barriers for MSMEs and create a pathway for scaling digital tools across more machines once the benefits become visible. The MSMEs themselves do not require DPIIT empanelment or startup recognition, as they serve as end users of the technology.

Strategic Importance for Indian Economy

The modernisation initiative holds significant importance given MSMEs' substantial contribution to India's economy. These enterprises contribute 30% to the country's gross domestic product and account for 45% of overall exports. The National Productivity Council, which functions under DPIIT, focuses on improving productivity and competitiveness across Indian industry and services.

According to data provided in December through a written reply in the Lok Sabha by minister of state for micro, small and medium enterprises Shobha Karandlaje, approximately 72 million MSMEs were registered in India by the end of November 2025 under the Udyam Registration Portal and the Udyam Assist Platform.

Global Competitiveness Requirements

From a global competitiveness perspective, such technological capabilities are increasingly becoming baseline requirements rather than optional upgrades. Small suppliers in major manufacturing economies including Germany, Japan, South Korea, and China are increasingly required to use machine monitoring, energy management systems, and basic digital twins to meet buyer expectations on quality consistency, traceability, energy efficiency, and sustainability.

Access to real-time production and energy data helps firms respond to buyer audits and compliance checks, including emerging requirements around carbon reporting. For Indian MSMEs, adopting these technologies could improve product consistency, reduce rejection rates, meet tighter delivery timelines, and support integration into global value chains. Improved shop floor data is expected to strengthen buyer confidence and enable repeat export orders, allowing small firms to compete on reliability and quality rather than purely on price.