Context:
The imposition of reciprocal tariffs has sparked concerns for India’s micro, small, and medium enterprises (MSMEs), particularly those operating in export-reliant sectors such as textiles, auto components, and gems & jewellery. These sectors have limited financial resilience to absorb global shocks and reorient business strategies swiftly.
Lenders Explore Risk-Sharing Mechanisms
State-owned lenders, including SBI, are considering revisions in credit guarantee schemes to de-risk MSME lending during this volatile trade environment. Discussions may be held with the Union Government to improve:
- Coverage terms under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
- Flexibility in repayment structures
- Interest subvention for exporters in impacted sectors
This would provide comfort to lenders while enabling MSMEs to access working capital without increasing default risks.
Sectoral Exposure and Relative Advantage
While certain industries may face immediate headwinds, India’s SMEs could gain relative advantage over exporters from countries like China, which face higher tariff rates from the U.S. However, to capitalize on this, incentives and infrastructure support will be critical. Industries such as pharmaceuticals are currently exempt from reciprocal tariffs and remain strong contributors to India’s export mix.
Lending and Growth Data
As per RBI’s latest data (February 2025):
- Credit to micro and small units: ₹7.84 trillion (↑ 9.7% YoY)
- Credit to medium-sized firms: ₹3.52 trillion (↑ 18.1% YoY)
This indicates sustained financing demand, but the quality and risk appetite behind these loans may shift if policy uncertainty or export decline continues.
Export Exposure and Policy Fluidity
India’s exports to the U.S. form ~4% of GDP, implying limited direct macroeconomic impact. However, SBI Research notes collateral risks due to:
- Global growth slowdown
- Financial market volatility
- Policy unpredictability in the U.S. affecting long-term planning
A one percent reduction in reciprocal tariffs to 26% for India offers marginal short-term relief, but the broader policy direction from Washington remains uncertain.
Strategic Actions Ahead
Key stakeholders, including industry associations, banks, and the government, plan to formulate coordinated action plans after further data emerges in the coming fortnight. These could include:
- Revising export financing norms for MSMEs
- Sector-specific fiscal incentives
- Enhancing logistics and compliance support to improve cost competitiveness
Outlook and Considerations
With India’s exports to the U.S. already on a declining trend since FY23, and the top 15 export items accounting for 63% of total U.S.-bound trade, the near-term focus will be on:
- Diversifying export markets
- Improving productivity in exposed sectors
- Ensuring continuity and consistency in bilateral trade policy to retain investor and lender confidence
