The Interest Equalisation Scheme (IES), a lifeline for India’s MSMEs, offered a 2–3% interest subsidy to counter high borrowing costs of 8–12%, enabling exporters to compete globally against nations like China and Vietnam, where rates are 2–4%. Ended on December 31, 2024, its absence threatens MSMEs, who drive 45.7% of India’s exports, with soaring costs and shrinking competitiveness. As trade barriers rise, exporters must act fast to adapt and demand policy support to stay in the global race.
The discontinuation of the IES has placed Indian MSME exporters in a precarious position. High interest rates, averaging around 8–12% for MSMEs in India, compared to 2–4% in competing nations, erode their price competitiveness. For example, a 3% interest differential can translate into a significant cost disadvantage when competing for contracts against exporters from China or Vietnam. This is particularly acute in sectors like textiles, garments, and pharmaceuticals, where MSMEs dominate but operate on tight margins. In 2022–23, ₹3,118 crore was disbursed under the IES, supporting approximately 11,000 exporters, with ₹2,641 crore disbursed between April and November 2024 alone.
The textile industry, a traditional stronghold for Indian MSMEs, is already feeling the pinch. Kumar Duraisamy, CEO of Eastern Global Clothing and Joint Secretary of the Tirupur Exporters Association as reported by the The Hindu BusinessLine, highlighted at the MSME Growth Conclave 2025 in Coimbatore that the government’s decision to end the IES has hit exporters hard. Tiruppur’s garment exports, which rose from ₹35,000 crore to ₹44,000 crore in 2024–25, rely heavily on the cost advantages provided by the IES. Without it, smaller exporters risk losing orders to competitors in Bangladesh or Southeast Asia.
Many small businesses, particularly micro-enterprises, were unaware of the IES or how to access it, limiting its reach. This lack of awareness has worsened financial strain post-discontinuation, with increased borrowing costs squeezing margins and forcing MSMEs to scale back or lose contracts. The absence of IES has led to significant losses, especially for chemical exporters, who previously benefited from 3–5% incentives, denting their global competitiveness. The lack of affordable credit hampers investment in innovation and quality, critical for competing in labor-intensive and high-tech sectors.
The discontinuation of the IES comes at a time when Indian exports face additional headwinds. Geopolitical tensions in the Middle East and West Asia, coupled with new trade barriers like the U.S.’s 25% tariffs on steel and aluminum, have already impacted $5 billion worth of goods. Engineering exports, a significant MSME contribution, saw a 0.82% year-on-year decline in May 2025, dropping to $9.89 billion due to these challenges. The loss of the IES exacerbates these pressures, potentially shrinking India’s export market share in key sectors.
Moreover, the absence of the IES could undermine India’s ambition to position itself as a trusted alternative in global supply chains, particularly as a “China plus one” destination. MSMEs, which supply critical components to defense, space, and high-tech industries, require affordable financing to invest in research, development, and compliance with global standards like sustainability reporting. Without the IES, many may struggle to scale or meet these demands, hampering India’s broader “Make in India” and export growth objectives.
The discontinuation of the IES is not just a policy shift—it’s a wake-up call for Indian MSMEs. While initiatives like e-commerce export hubs and Common Facility Centres (CFCs) in cities like Jaipur and Mumbai offer some relief, they cannot fully replace the financial cushion provided by the IES. The government’s focus on digital transformation and single-window systems is promising, but without affordable credit, MSMEs risk being priced out of global markets.
Exporters must act proactively, leveraging networks and trade bodies to push for policy reversals or alternative support mechanisms. The stakes are high: a 3% cost difference can determine whether an MSME secures an international order or loses it to a competitor. As global supply chains shift and India emerges as a viable alternative, MSMEs cannot afford to be sidelined by high borrowing costs. The government, too, must recognize that supporting MSMEs is not just about subsidies—it’s about ensuring India’s place in the global trade arena.
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