Indian MSMEs show Q1 growth, exports face tariff pressure

India’s Micro, Small, and Medium Enterprises (MSMEs) have demonstrated notable resilience in the first quarter of the financial year 2026 (Q1FY26), with over 50% of manufacturing and trading MSMEs reporting sales growth, according to the latest MSME Outlook Survey conducted by the Small Industries Development Bank of India (SIDBI). However, exporters within this sector are grappling with significant challenges due to global tariff issues, particularly the recent 25% tariff imposed by the United States, effective August 1, 2025. This article explores the performance of MSMEs, the impact of tariffs on exporters, and the broader economic context shaping India’s trade landscape.

According to SIDBI’s MSME Outlook Survey for April to June 2025, more than half of manufacturing and trading MSMEs experienced an increase in sales. In the services sector, 42% of MSMEs reported sales growth, while 48% noted stable sales, indicating a steady performance across diverse sectors. On a year-on-year basis, MSMEs across all sectors reported sales growth, with 60% of participants anticipating further growth in Q1FY27. This optimism is reflected in the Composite MSME Business Expectation Index (M-BEI), which stood at 62.19 for Q2FY26 and 67.88 for Q1FY27, signaling a positive outlook despite near-term uncertainties. Trading and services sectors showed particularly strong optimism, with M-BEI scores of 68.32 and 68.24, respectively, for Q1FY27.

The survey tracks six key parameters: sales, profit margins, availability of skilled labor, access to working capital finance, access to overall finance, and the overall business situation. These metrics highlight the sector’s ability to navigate domestic and global challenges, supported by government initiatives like the Production Linked Incentive (PLI) schemes and structural reforms aimed at achieving a US$ 1 trillion export target by FY26.

Tariff Challenges for Exporters

Despite the positive domestic performance, MSME exporters face significant headwinds due to global trade uncertainties, particularly the U.S.’s 25% tariff on Indian exports. Approximately 40% of MSME exporters reported being directly or indirectly affected by these tariffs, which have disrupted critical supply chains and increased costs. Sectors such as gems, pharmaceuticals, textiles, and electronics are particularly vulnerable, with the U.S. accounting for significant export volumes, including over US$ 10 billion in gems and US$ 8 billion in non-patented drugs annually.

The U.S. tariffs, announced by President Donald Trump, cite India’s energy purchases from Russia as a key reason, alongside claims of high Indian tariffs and non-monetary trade barriers. This move has strained India’s US$ 129.2 billion two-way trade with the U.S., potentially forcing companies like Apple to reconsider sourcing strategies. The textile sector, a major MSME contributor, is operating at reduced capacity (around 50% during the lean season), exacerbating challenges for exporters competing with countries like Vietnam and Indonesia.

Broader Economic Context

India’s trade performance remains resilient despite global shifts, with total exports (goods and services) growing by 5.9% year-on-year in Q1FY26. Core merchandise exports, excluding petroleum and gems, saw a stronger 7.2% growth, reflecting the strength of sectors like engineering goods, agriculture, pharmaceuticals, and electronics. The Department of Economic Affairs highlighted stable foreign exchange reserves, providing over 11 months of import cover, which cushions the economy against external shocks.

However, global trade uncertainties, including U.S. tariffs and China’s overcapacity, pose risks. The Asian Development Bank lowered India’s FY26 growth forecast to 6.5% from 6.7%, citing trade disruptions and reduced investment flows. Despite this, domestic consumption, driven by rural demand and a strong monsoon, is expected to support growth, alongside services and agriculture.

Government Response and Future Outlook

The Indian government is actively pursuing trade agreements to mitigate tariff impacts. Negotiations for a bilateral trade agreement with the U.S. are ongoing, with the fifth round underway in Washington, targeting completion by September 2025. India is also reviewing its free trade agreement with ASEAN and has secured concessions under the India-UK trade pact, which could benefit MSMEs in textiles and agriculture.

Despite a moderate dip in expectation indices for Q2FY26, the MSME sector’s optimism, driven by domestic demand and policy support, suggests resilience. The government’s focus on structural reforms and export diversification—evident in the rising share of exports to Asia, Africa, and the Middle East—offers hope for sustained growth.