India's micro, small and medium enterprises (MSMEs) have demonstrated resilience in the face of economic challenges, according to the latest SIDBI MSME Outlook Survey. Despite a modest decline in business optimism during the September quarter, the sector maintains a positive outlook for the future.

Key Findings

The survey reveals a slight dip in the Business Conditions Index, which fell to 61.64 from 63.75 in the previous quarter. However, the sector's resilience is evident in the projected Business Expectations Index, which is anticipated to rise to 66.57 by July-September 2026.

Sector-wise Performance

• Manufacturing and Services: These sectors maintained steady optimism.
• Trading Enterprises: Showed more volatility compared to other sectors.

Positive Trends

1. Improved Cost Pressures: Lower inflation has eased cost pressures on MSMEs.
2. Stable Profit Margins: Despite challenges, profit margins have remained stable.
3. Enhanced Credit Access: Manufacturing MSMEs, in particular, have seen improvements in credit accessibility.
4. Stronger Capacity Utilization: The survey indicates strengthened capacity utilization among MSMEs.
5. Positive Investment Sentiment: Over 60% of respondents expect improvements in ease of doing business.

Challenges

• Financing Issues: Smaller firms and companies in the services sector continue to face challenges in accessing finance.
• Credit Gap: According to World Bank estimates, India's MSMEs face a substantial credit gap of $380 billion.

MSME Sector Overview

The survey results suggest that while there are short-term fluctuations, the overall outlook for India's MSME sector remains positive. Factors contributing to this optimism include expectations of improving domestic demand and supportive policies, such as GST rate cuts.

As the backbone of India's economy, the MSME sector's resilience and adaptability in the face of changing economic conditions underscore its crucial role in the country's economic landscape. The projected improvement in business expectations indicates that despite current challenges, MSMEs are poised for growth and continued contribution to India's economic development.

The Indian micro, small, and medium enterprises (MSME) sector is pivoting towards the domestic market in response to increased US tariffs, with bankers expressing optimism about the sector's resilience. The shift comes as the festive season approaches and recent GST rate cuts take effect, potentially offsetting the impact of US trade policies.

US Tariff Impact on Indian Exports

The United States recently doubled tariffs to 50.00% on various goods, a move that has particularly affected export-oriented MSMEs in sectors such as:

• Textiles
• Gems and jewellery
• Seafood
• Engineering goods
• Auto components

This tariff hike has prompted Indian businesses to explore alternative strategies to maintain their competitiveness.

Adaptation Strategies

Indian MSMEs are responding to the tariff challenges through several approaches:

1. Shifting Focus to Domestic Markets: Companies are leveraging increased domestic demand, especially during the festive season.
2. Supply Chain Diversification: Businesses are looking to reduce dependency on single markets.
3. Exploring Alternative Export Markets: MSMEs are seeking new international customers to replace lost US business.
4. Routing Through Other Economies: Some exporters are considering indirect routes to reach the US market.

Bankers' Perspective

Financial experts are cautiously optimistic about the MSME sector's ability to weather this storm:

• Manish Kothari, Kotak Mahindra Bank: Believes that robust domestic demand and supply chain diversification could cushion the impact of US tariffs.
• Anshul Chandak, RBL Bank: Expects government support to protect affected sectors from undue credit stress.

GST Reforms: A Silver Lining

Recent GST reforms are seen as a positive factor for MSMEs:

• Reduced input costs
• Lower working capital pressures
• Improved overall financial health of the sector

Credit Implications

The shift towards domestic markets is expected to have several credit-related effects:

• Increased demand for fresh working capital
• Rise in incremental credit demand, particularly in MSME clusters
• Potential for new lending opportunities for banks

Looking Ahead

While the US tariff situation presents challenges, many in the banking sector believe that a combination of factors—including strong domestic demand, market diversification, and supportive government policies—will help MSMEs navigate this difficult period. The upcoming festive season is anticipated to play a crucial role in boosting domestic consumption, potentially providing a much-needed lifeline to affected businesses.

As the situation evolves, the resilience and adaptability of India's MSME sector will be put to the test, with the potential to emerge stronger and more diversified in its market approach.