Contrary to widespread apprehensions that India’s gross domestic product (GDP) growth might falter following the steep 50 per cent tariff imposed by the United States (US) on Indian goods, the country’s growth outlook remains resilient in the near term.
Most international institutions, including the World Bank and the International Monetary Fund (IMF), have raised their growth projections for India for 2025–26 by 20 basis points, pegging it between 6.5 per cent and 6.6 per cent. This upward revision reflects confidence in India’s domestic demand strength and its ability to absorb short-term shocks.
However, these agencies have simultaneously trimmed their forecasts for 2026–27 to around 6.2–6.3 per cent, suggesting that the real drag from the US tariffs could become visible in the next financial year if corrective trade negotiations are not concluded by the end of 2025.
The steep tariffs, effective from August 27, 2025, have targeted about USD 48.2 billion worth of Indian exports. Sectors such as textiles (USD 10.3 billion in US exports), gems and jewellery (USD 12 billion), chemicals (USD 2.34 billion), and seafood (USD 2.24 billion) are among the most affected. These are primarily labour-intensive sectors, heavily reliant on micro, small and medium enterprises (MSMEs) that form the backbone of India’s export ecosystem.
MSMEs contribute around 45 per cent of India’s total exports, and many of them operate on razor-thin margins in competitive global markets. Clusters such as Surat, Tirupur, and Moradabad are particularly vulnerable, as they house thousands of export-oriented units that are now struggling to cope with shrinking profit margins and uncertain demand.
The initial impact of the tariff shock has been cushioned somewhat, as many exporters had pre-emptively shipped goods to the US ahead of the tariff deadline to cater to holiday season demand extending through December 2025. Consequently, analysts expect a 30–40 per cent reduction in exports to the US during the current financial year—significant but not catastrophic.
However, the real challenge will surface next year when advance shipments dry up and US importers begin shifting to alternative suppliers such as Vietnam and Bangladesh, which enjoy lower tariff exposure and cost advantages.
While both India and the US have reiterated their commitment to negotiating a mutually beneficial trade deal, progress so far has been limited. Policymakers in New Delhi cannot afford to assume a swift resolution. If a trade agreement to lower or reverse the tariffs is not signed soon, Indian MSMEs risk losing long-term buyers in their largest export market.
This potential medium-term disruption is already evident in recent trade data. India’s exports to the US fell sharply to USD 5.43 billion in September 2025 from USD 6.87 billion in August—a sequential drop of 21 per cent. Nevertheless, India’s total merchandise exports grew 6.7 per cent year-on-year in September, supported by stronger performance in other markets and sectors such as electronics. But such diversification may not fully offset the scale of the US market loss, especially for MSMEs that rely on consistent, high-volume orders.
With over 63 million MSME units employing more than 111 million people, these enterprises are the lifeblood of India’s economic engine. They contribute nearly 30 per cent of GDP and almost half of the country’s exports. MSMEs are also the second-largest employment provider after agriculture, creating jobs at low capital costs and sustaining livelihoods in rural and semi-urban regions. In an economy that depends heavily on consumption demand, disruptions in MSME exports can have a domino effect—hurting wages, employment, and domestic consumption.
Therefore, policymakers must move decisively and pre-emptively, not reactively, to protect the MSME ecosystem from the fallout of US tariffs.
A key measure should be the immediate rollout of a credit guarantee scheme for MSME exporters, covering loans up to Rs 100 crore. This scheme could be modelled on the Mutual Credit Guarantee Scheme (MCGS) launched earlier in 2025 for the manufacturing sector, but with modifications tailored to exporters’ needs. For instance, the upfront contribution of 5 per cent required under MCGS could be reduced to 3 per cent for exporters to ease liquidity pressures. Similarly, the annual guarantee fees—currently nil in the sanction year, 1.5 per cent for the next three years, and 1 per cent thereafter—could be moderated further.
Parallelly, the government should expedite the introduction of a credit guarantee scheme, designed to incentivise banks to extend additional working capital—up to 20 per cent of outstanding loans—to MSMEs, including those whose accounts may have slipped into the “special mention account” (SMA) category due to payment delays caused by trade disruptions. A 100 per cent government-backed guarantee on these incremental loans would give banks the confidence to lend without fearing defaults. The Reserve Bank of India (RBI) should complement this move by offering temporary regulatory forbearance, as it did during the pandemic under the Emergency Credit Line Guarantee Scheme (ECLGS).
In addition to credit support, a revamped interest subvention scheme should be launched exclusively for MSME exporters, offering a 3 per cent interest subsidy on pre- and post-shipment rupee export credit. This scheme would replace the earlier Interest Equalisation Scheme (IES), which ended in December 2024 and had successfully reduced effective interest rates from 9–12 per cent to 5–7 per cent, thereby boosting export competitiveness.
Targeted support to labour-intensive sectors—such as textiles, gems and jewellery, handicrafts, leather, and footwear—would enable MSMEs in these areas to sustain operations and invest in diversification despite reduced order flows.
Digital transformation should be another pillar of the policy response. The government can subsidise the adoption of e-commerce platforms and digital marketing tools to help MSMEs reach global buyers more efficiently.
Ultimately, India’s response to the US tariff challenge must be both tactical and strategic. While short-term credit and subsidy measures can cushion the immediate impact, the long-term goal should be to enhance MSME competitiveness through structural reforms. Addressing chronic issues—such as high cost of finance, limited technology adoption, inadequate infrastructure, and regulatory complexity—will be essential to building resilience.
As India aspires to become a developed economy by 2047 under the Viksit Bharat vision, it cannot afford to rely on reactive policymaking. Global trade dynamics are shifting rapidly, and India’s export engine, powered by MSMEs, must adapt with foresight. Protecting and empowering MSMEs through targeted, timely, and technology-driven interventions will not only safeguard jobs and income but also anchor India’s long-term economic stability and growth.
In sum, the US tariff shock is a wake-up call—not a catastrophe. With proactive policymaking, focused financial support, and strong institutional coordination, India can turn this challenge into an opportunity to modernise its MSME sector, strengthen global competitiveness, and reinforce the foundation of its growth story for decades to come.