As we all brace for the Union Budget 2026-27, the spotlight is on the micro, small and medium enterprises (MSME) sector. Often known as the backbone of India’s economy, it accounts for more than 30% of the GDP. It contributes over 35% to manufacturing output, and makes up about 45–46% of exports.
The MSME segment is also the second-largest employer after agriculture, with employment estimates ranging from 100 million to nearly 290 million people. Despite this scale, Deloitte notes that MSMEs continue to face constraints around financing, skills, compliance readiness and exposure to global trade volatility.
Budget expectation: Building last-mile capacity
Several industry bodies have outlined that the last-mile capacity building is an area of concern. Deloitte describes it as an essential for formalisation and market integration.
The emphasis, here, is on practical and operational support that includes digital bookkeeping, accounting methods, and e-invoicing to comply with export norms and domestic quality standards such as BIS and FSSAI.
The Deloitte report also highlighted the need to train MSMEs to involve the use of artificial intelligence in quality control, demand forecasting and pricing. The report also added that policymakers should simplify access to AI infrastructure for smaller firms.
Equally important is onboarding MSMEs onto formal platforms such as TReDS, GeM and ONDC, which remain underutilised despite years of policy push. The objective, Deloitte argues, should be measurable increases in active participation rather than just registrations.
Budget expectations: Expanding credit beyond collateral
On financing, Deloitte has pointed to continued frictions in credit access, particularly due to high KYC requirements and reliance on collateral-based lending.
A major suggestion centres on a “green channel” for MSMEs that play by the rules, complete with standardised scorecards and quicker processing for those who have borrowed before. The report further suggests a move toward cash flow-based lending, leveraging data from GST filings, e-invoices, and utility payments to gauge creditworthiness.
Another idea is to establish a specific liquidity and growth fund for MSMEs, distributed through non-banking financial companies and fintechs, with first-loss protection provided by current government programs. Deloitte believes this would alleviate working capital pressures without placing undue strain on banks.
Budget expectations: From micro to medium – The missing middle
Deloitte has also drawn attention to structural issues around scale. More than 90% of MSMEs are microenterprises, limiting productivity gains and participation in value chains.
To address this, the report proposed district-level MSME transformation cells to track and support enterprises as they graduate from micro to small and then to medium. It also recommends mentor–mentee networks, where large PSUs and anchor firms guide MSME suppliers on quality standards, finance and market access.
Public procurement is another lever. Preferential scoring in government tenders for vendors with ZED or LEAN certifications, and a record of prompt payments, could nudge MSMEs towards formalisation and quality upgrades.
Building resilience against trade shocks
The Deloitte report suggested a Trade Resilience Fund for MSMEs that are vulnerable to changes in exports. This is because global tariffs and supply chain problems are becoming more common. The goal is to give short-term financial or credit help to industries that are likely to be affected by changes in tariffs. The companies under this category include readymade garments, gems and jewellery, and leather.
What the last budget delivered
One of the key highlights of last year’s budget was the substantial enhancement of credit support for MSMEs. The credit guarantee cover for micro and small enterprises has been doubled from Rs 5 crore to Rs 10 crore. Over five years, an additional Rs 1.5 trillion could be added in terms of credit and government support will also be provided through increased support for Start-Ups with a maximum loan amount of Rs 20 crore, which is an increase from Rs 10 crore previously. Priority sectors identified and defined will be offered lower guarantee percentages (1%) on any loans within the 27 priority sectors.
Export-oriented MSMEs will qualify for guaranteed “term-loan” amounts up to Rs 20 crore and will help enhance the competitive position of these businesses when compared to other businesses on a global scale.
A new “Fund of Funds” is being created at Rs 10,000 crore for all Start-Ups, and a new “Targeted Loan Program” will offer support for 500,000 first-time entrepreneurs (under-represented groups such as women, scheduled castes, and scheduled tribes) by offering loans of up to Rs 2 crore to first-time entrepreneurs over five years.
The “Focus Product Scheme” for Footwear and Leather is projected to create 2.2 million jobs with a revenue target of Rs 4 lakh crore.
Looking at new challenges for MSMEs
While the 2025 Budget was focused on providing credit opportunities to MSMEs through a variety of sources, the Budget for 2026 creates a new level of uncertainty for MSMEs, which are having to find ways to absorb capital, comply with new regulations and achieve sustainable growth rates. Therefore, it will be important to monitor how the government and policymakers will deal with the new issues created as a result of the lack of availability of capital for MSMEs.