As is widely understood, the annual Budget is a political document responding to short to medium-term economic challenges. Formally, it is an annual revenue and expenditure statement outlining the government’s priorities. As with any financial statement, the fine print matters the most, not obvious from the media headlines. Yet, it is useful to read the Budget closely to glean the broad direction of economic policy, especially as there are no other long-term policy documents or explicit economic targets in the public domain to locate the annual Budget.

Setting to the Budget

The proximate context of the Budget is the recent eruption of geopolitical turmoil triggered during the second term of the Donald Trump presidency in the United States. Many political and economic arrangements — or, the rules and norms of international relations that have been in place since the fall of the Berlin Wall — are now upended. India’s long-term economic and security arrangements with Russia are under threat. Mr. Trump’s steep tariffs on India’s labour-intensive goods have dashed hopes of a closer economic relationship with the U.S. In response, India is seeking closer ties with the European Union in the form of “mother of all” free trade agreement (FTA), though its details are still unclear. India’s import dependence on China continues despite the policy efforts taken, since 2020, to correct this. Diplomatic relations remain strained. For instance, China has imposed restrictions on the exports of critical minerals, tunnel boring machines and the services of skilled workers for the electric vehicle (EV) industry.

Editorial | Credible and creditable: On Union Budget 2026-27

Budget 2026-27 needs to be read in this context. Unlike previously, this Budget highlights the urgency of strengthening domestic manufacturing. It also aims to streamline import duties and procedures in order to reduce imports and achieve self-reliance, and to speed up exports.

Factually speaking, the Indian manufacturing sector has not performed satisfactorily for a while now, despite headline GDP growth of 6.5% to 7% annually in real terms (net of inflation). India has deindustrialised prematurely; the share of manufacturing in GDP has declined or, at best, has remained constant. Manufacturing employment in total employment has also declined. The official GDP numbers for manufacturing seem overstated due to infirmities in estimation. Alternative figures, based on the more reliable Annual Survey of Industries (ASI), based on time-tested production accounts of factories, show distinctly slower output growth rates. With very modest growth in fixed investment (or gross fixed capital formation), industrial capacity has eroded during the last decade.

Rising import dependence for most capital and intermediate goods is a reason for modest industrial performance. An inverted duty structure wherein intermediate goods face higher tariffs than final goods seems to be responsible for the poor industrial investments. Policy initiatives such as ‘Make in India’ (2014), Aatma Nirbhar Bharat (or Self-Reliant India Movement) in 2020 and Production Linked Incentives (2021) seem to have largely failed to dent India’s rising import dependence in manufactured goods despite some widely applauded successes in mobile phone assembly (with high import content, best exemplified by Apple iPhone exports).

Hence, the Budget aims to tackle domestic vulnerabilities.

The tariff modifications seem to correct for the inverted duty structures (IDS) by reducing basic customs duties on capital and intermediate goods in order to encourage domestic value addition. Likewise, rationalising procedures at points of entry of goods would perhaps reduce delays, thus improving ease of production and exports.

Focus on electronics, the China factor

The Budget makes substantial provision for augmenting the production of electronics parts and sub-assemblies, which form the single largest product-group of dependence on China. The same holds for rare earth materials (used in the production of EVs and electronic goods) — a choke point as the Economic Survey recently and rightly highlighted. To tackle it, the Budget proposes to create a dedicated rare earths corridor running through “mineral-rich States of Odisha, Kerala, Andhra Pradesh and Tamil Nadu … to promote mining, processing, research and manufacturing”. Similar to encouraging the production of lithium-ion cells for battery storage, the Budget proposes to extend the tax exemption on capital goods to produce these items.

Policymakers perceive India’s trade integration has to begin with labour-intensive goods. Now, with the Trump tariffs on India’s exports, there is an acute need to enhance the productivity of such goods to overcome these tariffs and ensure diversification away from the U.S. In line with this view, the Budget has laid emphasis on promoting new Micro, Small, and Medium Enterprises (MSME) clusters, modernising the old or “legacy” clusters (about 120 of them), and providing financial assistance to MSMEs to tap the capital market. In principle, these measures are welcome.

However, the Budget seems to fall short in efforts to boost fixed investment. To augment industrial capabilities, India needs to encourage investments in high-tech industries. Such technologies are mostly proprietary items of multinational corporations that often come bundled with foreign direct investment (FDI). In recent years, net FDI, as a ratio of GDP, has become practically zero. The Budget seems to make little effort to correct for the decline in foreign high-tech investments. Geopolitical uncertainties perhaps make it difficult to attract such technology-intensive investments, at least for now.

While the government is committed to promoting exports, the Budget has permitted firms located in special economic zones (SEZs) to sell a part of their output in domestic territory. This seems regressive. The government should tackle their hurdles to augment exports, rather than choose the softer option of allowing sales in the domestic market.

A silence on Centre-State fiscal issues

The Budget, which has been presented in a difficult global context, seems well-intentioned to tackle import dependence in domestic manufacturing to attain greater self-reliance. However, considering the uncertainties, the Budget seems silent on many difficult issues. Centre-State fiscal issues have also been overlooked, considering the impending implementation of the recommendations of the Sixteenth Finance Commission. Whether the proposed measures would yield desired results to reverse India’s industrial decline and import dependence (especially on China, a strategic threat) would depend on the specifics of the proposals (which we have not seen) and how they are implemented.

R. Nagaraj was with the Indira Gandhi Institute of Development Research (IGIDR), Mumbai

Published – February 02, 2026 12:16 am IST

A view of a MSME Industrial unit at Ambattur Industrial Estate in Chennai.
| Photo Credit: The Hindu

Micro, Small and Medium-scale Enterprises (MSMEs) that employ 23.24 crore people in the country continue to face challenges in the regulatory environment, noted the Economic Survey tabled on Friday (January 31, 2025).

“Regulatory compliance burden holds back formalisation and labour productivity, limits employment growth, chokes innovation and depresses growth,” it said.

MSMEs create a large number of jobs at relatively low capital costs and hence play a crucial role, second only to agriculture. They drive economic growth, employment generation, and innovation.

Yet, there is an “observed tendency for firms in India to remain small.” So, they lose access to institutional capital, skilled talent, and technology infusion and often operate outside the formal supply chains. This creates a parallel, informal economy and contributes to low labour productivity, the Survey noted.

“The logic for staying small often is to remain under the regulatory radar and steer clear of the rules and labour and safety laws. Ironically, the biggest casualties are employment generation and labour welfare, which most regulations were originally designed to encourage and protect, respectively,” it said.

The efforts of the government in the last 10 years focused on improving access for the MSMEs to finance, enhancing technological capabilities, providing market linkages, and addressing structural challenges.

In a move to formalise the informal micro enterprises, the government in collaboration with SIDBI, introduced the Udyam Assist Platform (UAP) in 2023. Over 2.39 crore informal micro enterprises have been formalised through the platform.

Goa, T.N. example

The launch of TReDS aims to help the MSMEs realise their receivables in a time-bound manner at a relatively lower financing cost. The governments of Goa and Tamil Nadu have set an example by adopting the TReDS platform. Goa, which is largely reliant on tourism, leveraged TReDS during the COVID-19 disruption to enhance supplier liquidity, facilitating payments for over 250 MSMEs since October 2020, with invoice discounts. Tamil Nadu joined TReDS in 2022 under the Raising and Accelerating MSME Performance (RAMP) programme, supporting MSMEs in significant numbers.

To provide equity funding to MSMEs with the potential to scale up, the government launched the Self-Reliant India (SRI) Fund with a corpus of ₹50,000 crore. The fund has a provision of ₹10,000 crore from the government and ₹40,000 crore through private equity/venture capital funds.

The government has introduced measures such as MSME Samadhan and the CHAMPIONS (Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength) portal, and a portal that gives information about individual CPSEs, Central ministries, State governments, and other buyers regarding the payments pending with them in respect of the MSMEs. The portal also facilitates MSEs to file their delayed payment-related complaints online. From the date of launch of the MSME Samadhaan portal, 2.2 lakh applications have been filed by MSEs, of which 20,652 have been mutually settled.

The government is also implementing the Micro and Small Enterprises-Cluster Development Programme (MSE-CDP) across the country. Under this, Common Facility Centres (CFCs) are developed to address common issues, such as improvement of technology, skills, quality, etc. As per the report of the evaluation study of MSE-CDP conducted by the National Productivity Council, the scheme has been able to improve the efficiency of the value chain of the units in the cluster, resulting in overall productivity growth of around 10-15 % and growth in turnover in the range of 20-30 %.

A worker operates a machine inside a small scale manufacturing unit in Mumbai. File
| Photo Credit: Reuters

The Supreme Court has held that banks or creditors are required to identify the incipient stress in the account of the Micro, Small and Medium Enterprises (MSMEs), before their accounts turn into non-performing assets.

A Bench headed by Justice Bela Trivedi pronounced the recent order in a batch of appeals filed by MSMEs, represented by advocate Mathews J. Nedumpara, focusing on a notification ‘Instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ issued on May 29, 2015 under Section 9 of the MSMED Act, revised by the Reserve Bank of India (RBI) in March 2016 in exercise of the powers conferred by Section 21 and 35(A) of the Banking Regulation Act.

The court held that the May 2015 notification has “statutory force binding to all Scheduled commercial banks, licensed to operate in India by the RBI”.

“The entire exercise as contained in the ‘Framework for Revival and Rehabilitation of MSMEs’ is required to be carried out by the banking companies before the accounts of MSMEs turn into non-performing asset (NPA),” the court held.

However, the Bench directed that it would also be incumbent on the part of the MSMEs concerned to produce authenticated and verifiable documents/material for substantiating its claim of being MSME before its account is classified as NPA.

“If that is not done, and once the account is classified as NPA, the banks i.e. secured creditors would be entitled to take the recourse to Chapter III of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) Act for the enforcement of the security interest,” the two-judge Bench ordered.

The appellant MSMEs had challenged a Bombay High Court decision of January 11, which dismissed their writ petitions. The High Court had held that banks and Non-Banking Financial Companies (NBFCs) were not obliged to adopt the restructuring process as contemplated in the May 2015 notification without any specific applications for the purpose from MSMEs.

Mr. Nedumpara had argued that the banks could not have classified the loan accounts of the MSMEs as NPA without following the procedure laid down in the May 2015 notification.

“It was incumbent on the part of the banks/ NBFCs to identify incipient stress in the account… and to explore various options to resolve the stress in the account as contemplated in the May 2015 notification,” Mr. Nedumpara had argued.

Watch: Union Budget gives a leg-up to MSMEs, manufacturing sector

The Union Budget for 2024-2025 has a package of support measures for the Micro, Small and Medium-scale Enterprises (MSMEs) and the labour-intensive manufacturing sector.

According to the Economic Survey tabled on Monday, the contribution of MSMEs to all-India manufacturing output in FY 22 was 35.4% and the share of MSME-made products in exports in FY 24 was 45.7%.

“This budget provides special attention to MSMEs and manufacturing, particularly labour-intensive manufacturing. We have formulated a package covering financing, regulatory changes, and technology support for MSMEs to help them grow and also compete globally,” said Finance Minister Nirmala Sitharaman.

The budget proposes a credit guarantee scheme that will work on pooling of credit risks of MSMEs to facilitate term loans to MSMEs for purchase of machinery and equipment without collateral or third-party guarantee. A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to ₹100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance. Public sector banks will build in-house capabilities to assess MSMEs for credit. They will also take a lead in developing a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy so that MSMEs without a formal accounting system are also covered.

Credit availability

In a move to provide relief to MSMEs during stress period, credit availability will be supported through a guarantee from a government promoted fund. The limit of Mudra loans will be enhanced to ₹20 lakh from the current ₹10 lakh for those who have repaid previous loans under the ‘Tarun’ category.

To facilitate MSMEs unlock their working capital by converting their trade receivables into cash, the turnover threshold of buyers for mandatory onboarding on the TReDS platform will be reduced from ₹500 crore to ₹250 crore. “This measure will bring 22 more CPSEs and 7,000 more companies onto the platform,” the Finance Minister said.

E-Commerce Export Hubs will be set up on public-private-partnership mode so that MSMEs and traditional artisans sell their products in the international markets.

An investment-grade energy audit of traditional micro and small industries will be done in 60 clusters and financial support will be provided to shift them to cleaner forms of energy and implementation of energy efficiency measures. The scheme will be replicated in another 100 clusters in the next phase. Rental housing with dormitory type accommodation for industrial workers will also be facilitated on PPP mode.

Sudhir Jha, national convener, All India Manufacturers Organisation and vice-president of the MSME Development Forum, said the MSME policy of the government needed a relook to improve the entire eco system of MSMEs to meet the current challenges.

The revamped credit guarantee scheme for Micro, Small and Medium Enterprises (MSMEs) will take effect from April 1, through infusion of ₹9,000 crore in the corpus, said Union Finance Minister Nirmala Sitharaman while presenting the Union Budget 2023.

“This will enable additional collateral-free guaranteed credit of ₹2 lakh crore. Further, the cost of the credit will be reduced by about 1%,” she said.

“Further, in cases of failure by MSMEs to execute contracts during the COVID-19 period, 95% of the forfeited amount relating to bid or performance security will be returned to them by government and government undertakings. This will provide relief to MSMEs”, the Finance Minister said.

The total allocation for the MSME Ministry will see a nearly 42% increase for 2023-24 with ₹22,138 crore to be made available compared to ₹15,629 crore in 2022-23. Schemes such as Raising and Accelerating MSME Performance (RAMP) and Scheme for Fund for Regeneration of Traditional Industries (SFURTI) will see significantly higher allocation compared to FY23.

The Federation of Indian Micro and Small & Medium Enterprises (FISME) and the Coimbatore District Small Industries Association (CODISSIA) said in press statements that to ensure MSMEs received payments on time, the Budget has proposed that deduction for expenditure incurred on payments made to MSMEs will be allowed for buyers only when the payment is actually made. This means buyers cannot claim deduction without paying the MSMEs.

The FISME added that setting up of a National Financial Information Registry will help create a robust information system and help MSMEs access loans. The Common Universal Identifier for businesses proposed in the Budget will also rid MSMEs of the need for having multiple identities, it added.