Industry and various stakeholders have urged the government to place manufacturing-led growth and scaling up of Micro, Small, and Medium Enterprises (MSMEs) at the core of its economic strategy in the Union Budget 2026–27.
With domestic demand showing signs of revival, the focus has shifted to tax rationalisation, lower cost of capital and measures to enhance trade competitiveness, so that MSMEs can expand capacity, integrate into global value chains, and generate employment at scale.
Industry view
The PHD Chamber of Commerce and Industry (PHDCCI) flagged the need to scale up MSMEs to aid their transition into global value chains.
“A renewed focus on scaling manufacturing and MSMEs through capital support, tax rationalisation, and production-linked incentives is necessary. High input costs, long maturation periods, and global competition and uncertainty continue to restrict domestic manufacturing capacity,” the chamber said.
Inverted duty
The budget is expected to support manufacturing, which is crucial for the growth of the retail sector, Paresh Parekh, partner and National Leader for Tax, consumer products and retail sector, EY India, said.
He said enhanced support for MSMEs, promotion of digital payments, and targeted fiscal relief through lower personal taxes could strengthen disposable incomes and consumer sentiment, directly stimulating retail demand.
Recent GST rate reductions have already helped spur demand in FMCG and consumer durables, potentially catalysing fresh capital investment.
Inverted GST structures, where inputs and services are taxed at higher rates than finished goods, continue to result in significant credit accumulation, especially given the sector’s heavy spending on advertising, services, and capital goods, Parekh said.
Addressing these structural issues in the indirect tax system could provide meaningful relief to industry, he said.
FISME’s view
The Federation of Indian Micro and Small & Medium Enterprises (FISME), in its budget submission, too, said MSMEs are at a critical juncture as recent demand-boosting measures such as higher income-tax exemptions and GST simplification are expected to trigger a new growth cycle.
The key challenge, however, is ensuring that the increased demand is met by domestic production, particularly by MSMEs, so that employment is generated locally and economic gains are distributed more equitably, FISME said.
Government steps
The government has recently taken several steps to strengthen MSME exports and ease operational challenges.
Key levers of the Rs 25,060-crore Export Promotion Mission were rolled out in December and this month to provide affordable trade finance, export credit support, and diversification into new markets for MSME exporters facing steep tariffs of up to 50 percent from the US.
Under the mission’s Niryat Protsahan component, the government has also launched an interest subvention scheme offering roughly 2.75 percent interest support on pre and post-shipment rupee export credit for MSME exporters, with additional incentives proposed for under-represented markets.
Late last year, authorities withdrew multiple quality control orders (QCOs) covering key chemicals, petrochemicals, polymers, synthetic fibres, yarns, and other intermediate inputs used extensively in textiles, plastics, packaging, automotive components, and other downstream manufacturing industries.
The move is aimed at easing regulatory burdens on MSMEs and the manufacturing sector.
Pain points
FISME’s submission also underlines that tax issues continue to discourage entrepreneurship, formalisation and scaling up of MSMEs.
High effective taxation on distributed profits, inverted GST duty structures and the absence of GST refunds on plant and machinery strain MSME cash flows.
Rationalising these tax provisions would improve liquidity, incentivise investment, and accelerate technology upgradation in manufacturing MSMEs, FISME said.
Small business view
The Indian Small Business & Franchise Association (ISFA), in its pre-budget expectations survey report, underscores persistent structural challenges faced by micro enterprises, including limited access to affordable credit, regulatory compliance hurdles, and high operating costs that hinder scalability and formalisation.
It has called for targeted fiscal measures to ease credit flows, broader tax relief for small business segments and enhanced support for franchise-led growth models to strengthen market access and competitiveness.
Manufacturing push
PHDCCI, too, has suggested rationalisation of customs duties on critical raw materials, extension of concessional tax regimes for new manufacturing units and stronger credit guarantee mechanisms and industrial infrastructure for MSMEs.
“As manufacturing remains central to job creation, export growth, and supply chain resilience, the upcoming Budget 2026–27 presents an opportunity to strengthen India’s manufacturing determination by shifting from disjointed incentives toward a framework that lowers risk, attracts private capital, and enables firms to scale efficiently,” it said.
