Navigating the Headwinds: Indian MSMEs Charting a Course Through Tariffs Towards Sustainable Growth–A Renewed Perspective

The Indian Micro, Small, and Medium Enterprises (MSME) sector, a vibrant engine of the nation’s economy, finds itself at a critical juncture. The recent imposition of a 50% tariff by the United States on Indian goods, effective August 27, 2025, presents unprecedented challenges, demanding strategic adaptation and a keen eye for new opportunities. This thought leadership piece aims to equip Indian MSMEs, engaged in both domestic and cross-border trade, with insights into navigating these pressures, leveraging government support, and embracing financial innovations, including the capabilities of platforms like DTX TReDS and GTX for factoring, for sustained growth and market diversification.

The Storm on the Horizon: Challenges Posed by US Tariffs

The 50% US tariff, stemming from an initial 25% duty followed by an additional 25% due to India’s purchases of Russian oil, targets approximately $60.2 billion of Indian exports to the US, India’s largest trading partner. This significant duty threatens to render Indian exports “completely noncompetitive,” with reports from the Global Trade Research Initiative (GTRI) and Barclays warning of severe economic consequences.

Macroeconomic Impact:

Economists and think tanks estimate a significant reduction in India’s GDP growth. Nomura has cut India’s FY26 GDP growth forecast to 6% from 6.2%, while GTRI projects a worst-case scenario where the tariffs could lead to a 0.9 percentage point decline in growth, bringing the overall FY26 GDP growth to 5.6%. This downturn poses threats to jobs, investment, and labor markets across the country. India’s economy, the world’s fifth-largest, recorded exports of $820.93 billion in FY 2024-25, but these tariffs jeopardize this growth, especially for merchandise exports to the US, valued at an estimated $86.5 billion in FY25. GTRI projects that if no mitigating actions are taken, India’s exports to the US could see a substantial decline of 43%, potentially dropping to $49.6 billion.

Microeconomic & Sector-Specific Vulnerabilities: 

MSMEs are particularly vulnerable, employing over 280 million workers and contributing a substantial 45.73% of India’s exports in FY25. Operating on often thin margins, these enterprises face existential risks as US demand is expected to contract.

• Textiles and Apparel: This sector, where MSMEs account for over 70% of exports, is heavily concentrated in clusters like Tirupur, Surat, and Panipat. The tariffs, increasing the old rate of around 11% to a staggering 61%, could lead to a 15-20% drop in US orders. GTRI warns that exports from this sector could plunge by 70%, endangering hundreds of thousands of jobs. Indian goods become less competitive compared to those from Vietnam and Bangladesh, which face a combined tariff of 31%.
• Gems and Jewellery: With MSMEs contributing 65% of exports and relying heavily on the US market ($10 billion in 2024), this sector faces a potential 20-30% revenue drop. Small-scale jewellers and artisans, particularly in hubs like Jaipur and Surat, may struggle with business insolvency and job losses, often lacking the capital to pivot to new markets. The Gem and Jewellery Export Promotion Council (GJEPC) has expressed fears of far-reaching repercussions, given the sector’s high dependence on the US market, which accounts for over $10 billion in exports.
• Seafood: Predominantly managed by MSMEs, this sector anticipates a 20% reduction in US exports. Crisil Intelligence highlights the disadvantages faced by Indian seafood exporters compared to competitors like Ecuador, which benefits from a geographical advantage and a significantly lower 15% tariff. This could have a severe impact on small farmers and MSME processors, leading to rural distress.
• Chemical Sector: MSMEs hold about a 40% share in this sector, where tariffs will surge from 3.7% to 53.7%. Small chemical manufacturers may face reduced demand for specialty products.

Arguments Against the Severity of the Impact: 

While the outlook appears grim, some counterarguments and mitigating factors are being considered:

• Exemptions: According to GTRI, approximately 30% of India’s exports to the US, valued at $27.6 billion in FY25, will remain duty-free. This includes key product categories like pharmaceuticals (approximately $12.7 billion in exports to the US in 2024), electronics, and petroleum products. This provides some relief and shows that the impact is not universal across all export sectors.
• Pharmaceuticals: The US relies on Indian generics for 30-35% of its pharma revenue, making it difficult for tariffs to be implemented on this sector without impacting US consumers and healthcare costs. The sector’s exemption is a crucial mitigating factor.
• Steel: The US imports less than 1% of Indian steel, mostly flat products not primarily produced by MSMEs. Therefore, the impact on this sector’s MSMEs is expected to be minimal or neutral.
• Domestic Resilience: Some analysts, like Nomura’s Aurodeep Nandi, suggest that the impact could be partially offset by robust domestic consumption, especially with potential GST reductions on certain goods.

Charting a New Course: Opportunities and Strategic Next Steps

Despite the challenges, the Indian government is working in a “war room manner” to support affected sectors, prioritising MSME resilience. This period demands reinvention and strategic redirection from MSMEs.

1. Leveraging Comprehensive Government Support and Policy Reforms: 

The government’s proactive stance offers a lifeline through various fiscal policies and incentives.

• Financial Assistance & Schemes:
  • The Export Promotion Mission (EPM) scheme offers a ₹25,000 crore ($3 billion) package comprising targeted subsidies and low-interest loans for MSMEs in tariff-affected sectors.
  • The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) provides collateral-free credit, with coverage up to ₹5 crore loans. In FY 2024-25 alone, a record ₹3 lakh crore worth of credit guarantees were extended under this scheme.
  • Pradhan Mantri MUDRA Yojana (PMMY) offers loans up to ₹10 lakh to non-farm, non-corporate MSMEs, with the limit recently increased to ₹20 lakh in Budget 2025 to scale small ventures. A study on the effectiveness of EDPs found MUDRA to be the most effective scheme in promoting MSME growth.
  • Credit Guarantee Enhancements (Budget 2025) has increased loan limits for MSMEs to ₹10 crore and for startups to ₹20 crore with lower fees. Targeted credit guarantees are provided for MSME exporters impacted by US tariffs, offering 10-15% guarantees on stressed loans (SMA 0–2) and 70-75% guarantees on term loans.
  • The government is also considering reactivating the Emergency Credit Line Guarantee Scheme (ECLGS), which was successfully used during the COVID pandemic, to provide government-backed, collateral-free working capital.
• Market Diversification: 

The government is actively facilitating MSME access to alternative global markets like China, Latin America, and Africa through trade fairs and export promotion councils. India’s agro-based industries, for instance, are poised for significant growth driven by increasing demand and supportive government policies. Experts recommend a particular focus on the Russian market, where India’s textile share is currently less than 1%, indicating significant growth potential.

• Policy Reforms & Skill Development:
  • The “Made in India” initiative is expanding production-linked incentives for MSMEs.
  • GST reforms are being implemented to reduce input costs, aiming to help small producers remain competitive domestically and globally, though analysts note no positive near-term impact on easing tariff pain.
  • The Udyam Registration Portal has registered 6.5 crore MSME units, simplifying formalization and enabling access to various government schemes.
  • The Rebate of State and Central Taxes and Levies (RoSCTL) refunds are being considered for an increase to 10-15%, and a five-year extension of the scheme is being contemplated for the apparel sector to offset embedded taxes.
  • SFURTI (Scheme of Fund for Regeneration of Traditional Industries) & RAMP Initiatives support clusters via infrastructure and branding, integrate digital tools and e-commerce, benefiting many women-led MSMEs.
  • The ADEETIE (Energy-Efficient Tech Scheme) provides ₹1,000 crore for MSME energy upgrades, including subventions, capacity building, and energy audits.
  • State-level initiatives, such as the UP MSME Industrial Estate Management (2025), revamp industrial estate governance through e-auctions and inclusive reservations

2. Embracing Financial Technology: The Role of TReDS and ITFS: 

The rising US tariffs are driving up costs and reshaping trade flows, highlighting the urgent need for efficient financing for MSMEs. Innovations in financial technology, such as TReDS and International Trade Finance Systems (ITFS), offer crucial mechanisms.

• DTX TReDS for Domestic Liquidity and Competitiveness: 

Platforms like the DTX TReDS platform are critical solutions for MSMEs. TReDS, in general, enables MSMEs to receive payments for their invoices in less than 24 hours at competitive rates, which is crucial for managing higher input costs and market volatility without compromising growth. The TReDS platform has experienced a remarkable Compound Annual Growth Rate (CAGR) of over 100% in the past five years, with a registered seller base of more than 45,000 MSMEs.

• Enhanced Adoption: 

Government policy measures are actively driving wider adoption of TReDS. The government has lowered the turnover threshold for mandatory TReDS registration, enabling more MSMEs to participate. The Small-to-Small (S2S) financing model is also being promoted to facilitate invoice discounting directly between MSMEs, reducing dependence on traditional banking channels. This initiative is backed by a Credit Analytics Engine that assesses creditworthiness using data from bank statements, GSTN records, and TReDS transaction history.

• ITFS (GTX Platform) for Cross-Border Diversification and Export Factoring: 

To reduce dependence on US exports and facilitate trade with new, growing markets, MSMEs must leverage international trade finance solutions. An International Trade Finance System (ITFS) with a platform like GTX can play a vital role in factoring export invoices.

• Factoring Export Invoices: 

This platform helps MSMEs get immediate liquidity against their export receivables. For MSMEs seeking to diversify their markets into regions like Southeast Asia, Europe, and the Middle East, the GTX platform can factor invoices from these new trading partners, providing upfront cash and mitigating credit risks associated with international buyers. This enables MSMEs to manage their cash flow efficiently, invest in production for new markets, and rapidly expand their global footprint beyond traditional dependencies.

• Broader FinTech Ecosystem: 

India boasts one of the largest and fastest-growing FinTech ecosystems globally, driven by robust government reforms towards a digital economy. The alternative lending sector, which includes MSME lending, is crucial in addressing the country’s $240 billion MSME financing gap. FinTechs like LendingKart, Flexiloans, and KredX are playing a vital role in this space.

3. Cultivating Domestic Strength and Reinvention: 

The current environment underscores the need for Indian industries to reinvent themselves and strengthen their domestic consumption economy.

• Boost Domestic Consumption: Discussions around reducing GST on certain goods are aimed at stimulating domestic sales to offset export declines. Industrialists are encouraged to pass on these GST reductions directly to consumers to ensure the benefits are realized and boost demand.
• Focus on Quality and Resilience: In times of market volatility, focusing on quality stocks and companies with strong domestic economic ties is a prudent strategy for investors. MSMEs should similarly prioritise product quality and operational efficiency to build resilience against external shocks.

Conclusion

The 50% US tariffs undoubtedly cast a long shadow over India’s export-driven MSME sector, threatening significant revenue and job losses in key industries such as textiles, gems, and seafood. However, this challenging period also serves as a catalyst for reinvention and strategic growth. Through comprehensive financial assistance, aggressive market diversification into new global regions, and a concerted push towards policy reforms and digital financial solutions like DTX TReDS for domestic trade and ITFS with platforms like GTX for factoring international export invoices, the Indian government is empowering MSMEs. By embracing these strategic next steps, Indian MSMEs can solidify their foundation, explore new global markets, enhance their domestic footprint, and contribute to India’s sustained economic growth and resilience. The collective effort of individuals, industry, and government will be crucial in successfully fighting through this challenging period.