Editor’s Note
This article examines the immediate impact of recent U.S. tariff measures on key Indian export sectors. It highlights the significant financial pressures on MSMEs and the broader strategic implications for trade policy, underscoring a critical juncture for affected industries.
The recent 50% ‘Trump Tariff’ (import duties announced by US President Donald Trump) targeting India’s key export sectors, particularly textiles, marine foods, and gems & jewellery, has caused concern across many parts of the country. Financial pressure is mounting on Micro, Small, and Medium Enterprises (MSMEs) in Surat, where 80% of diamond-exporting units are concentrated, while apparel exporters in Tiruppur are facing an effective tariff of over 61%, creating a real crisis situation.
There is apprehension that these import tariffs could affect sectors that account for nearly 25% of India’s exports to the US. This tariff poses a threat to companies with limited margins and pricing power. However, this immediate crisis should be viewed in the context of the vast potential of the MSME ecosystem. Their capacity has not yet been fully utilized.
Despite a commendable threefold increase over the past four years, the number of exporting MSMEs was just 173,350 as of May last year. When viewed against the strong base of 7.3 crore (73 million) MSMEs, this figure represents a mere 0.23%. In simple terms, the enterprises producing nearly half (45.79%) of India’s exports constitute less than a quarter of a percent of the MSME base.
The majority of MSMEs in India are micro-enterprises, and many of these are part of the informal sector. Their business scale is not large, nor do they possess the necessary technology. Furthermore, their structure is not geared to meet the demands of key sectors in the Global Value Chain (GVC), which involves complying with complex international certifications. Additionally, there is a need for the capability to implement modern inventory management models like ‘Just in Time (JIT) and Lean Manufacturing,’ which require digital technology and reliable logistics. Integration with Industry 4.0 tools is also crucial.
A significant opportunity for India will only materialize when a vast, inactive base can be transformed into a formal, GVC-ready supplier pool. To capitalize on this opportunity, targeted, implementation-focused interventions are needed, moving beyond general welfare measures. Additionally, access to capital remains the biggest hurdle. The sector faces an estimated credit demand-supply gap of up to ₹30 lakh crore (30 trillion rupees).
New investment is needed to join GVCs, particularly for technology upgrades. This will require funds for purchasing new machinery, meeting certification-related compliance, and utilizing digital tools. The government should promote fintech solutions that move beyond traditional methods, using GST/enterprise data and Artificial Intelligence (AI) for credit scoring. This would help meet working capital needs for export orders. Cluster financing arrangements would also be helpful.
Furthermore, although India’s logistics cost is roughly estimated at 7.97% of GDP, a deeper dive is now necessary. A recent report by the Department for Promotion of Industry and Internal Trade and the National Council of Applied Economic Research reveals that logistics costs for small industries are up to 16.9% of their production, while for large industries, this cost is 7.6%. This disparity causes small industries to quickly fall out of competition.