India’s small and medium enterprises (SMEs) have long been the backbone of its economy, contributing significantly to employment and GDP. In 2025, a series of economic policy reforms have aimed to bolster this sector. While some measures have provided much-needed relief, others have introduced new challenges that SMEs must navigate.
GST Rationalisation: A Boost for Retailers
The recent Goods and Services Tax (GST) rationalisation has been a welcome change for the organised apparel retail sector. According to Crisil Ratings, this adjustment is expected to boost revenue growth by approximately 200 basis points in the current fiscal year. Factors such as strong festive season demand and increased affordability are driving consumer spending, contributing to this positive outlook.
Union Budget 2025-26: Support for MSMEs
The Union Budget 2025-26 introduced several measures aimed at strengthening the MSME sector. These include enhanced credit access, support for first-time entrepreneurs, and a reduction in the tax deduction at source (TDS) on e-commerce transactions from 1% to 0.1%. Such initiatives are designed to ease the financial burden on small businesses and encourage innovation and expansion.
Challenges: Tariffs and Inflation
Despite these supportive measures, SMEs face significant challenges. The imposition of a 25% tariff on Indian exports by the United States has disrupted trade, particularly affecting export-focused SMEs. These businesses are now scrambling to cushion the blow through market diversification and collaborative strategies.
Additionally, inflation remains a concern. The Reserve Bank of India reported an inflation rate of 5.1% in July 2025, above its comfort target of 4%. This persistent inflationary pressure affects the cost of raw materials and operational expenses, challenging SMEs to maintain profitability.
Digital Transformation: An Avenue for Growth
On a positive note, digital transformation offers SMEs an opportunity to enhance efficiency and reach. The adoption of artificial intelligence (AI) and digital tools can unlock significant economic value for the sector. A recent playbook by the World Economic Forum suggests that AI could potentially unlock over $500 billion in economic value for India’s MSMEs.
