India’s micro, small and medium enterprises (MSMEs) are entering a renewed phase of strength, reaffirming their role as the backbone of the country’s entrepreneurial economy. After the disruptions caused by the pandemic, the sector has not only recovered but has also shown measurable improvements in output, exports, credit access, and financial stability—signalling a deeper structural shift rather than a temporary rebound.
In FY25, MSMEs contributed nearly 30 percent to India’s GDP, up from 27.3 percent in FY21, reflecting a steady climb from post-Covid lows. This expansion has been driven by three key forces: accelerated formalisation, improved access to institutional finance, and stronger participation in domestic and global value chains.
Exports Power the MSME Growth Story
Exports have emerged as a defining growth engine for MSMEs. Over the last five financial years, MSME exports tripled to ₹12 lakh crore, now accounting for 46 percent of India’s total exports. This surge highlights the growing competitiveness of small businesses across manufacturing and services, as well as their increasing integration into international supply networks.
For entrepreneurs, this shift underscores the expanding role of MSMEs in India’s export ecosystem. Smaller firms are no longer confined to local markets—they are supplying components, products, and services to global buyers, often leveraging technology and specialised capabilities to compete effectively.
Credit Expansion Reflects Rising Confidence
The revival in economic activity has been accompanied by a sharp rise in credit availability. Outstanding MSME credit reached ₹40 lakh crore by August 2025, nearly 2.5 times higher than levels seen five years earlier. This growth reflects improved lender confidence and a broader acceptance of MSMEs as viable, scalable borrowers.
While micro and small enterprises continue to dominate borrowing, accounting for 71 percent of MSME credit, their share has declined from 79 percent in FY20. At the same time, medium enterprises have increased their share to 29 percent, signalling the emergence of stronger, more mature businesses capable of absorbing larger capital flows.
The total small business credit portfolio expanded further to ₹45 lakh crore by June 2025, growing over 19 percent year-on-year. Enterprise borrowers recorded the fastest credit growth and the lowest delinquency levels, highlighting the advantages of scale, better governance, and disciplined financial management.
Improving Asset Quality Strengthens the Sector
One of the most encouraging developments has been the improvement in asset quality. MSME non-performing assets (NPAs) declined to ₹80,749 crore in FY25, down significantly from ₹1.1 lakh crore in FY21. Although micro enterprises still account for a majority of stressed assets, the overall reduction points to strengthening balance sheets across the sector.
NPAs declined across all segments—micro, small, and medium enterprises—supported by targeted government interventions, restructuring measures, and more prudent lending practices. This trend suggests growing financial resilience and a maturing credit ecosystem.
Formalisation Gains Momentum
Formalisation has been a critical enabler of MSME growth. Registrations on the UDYAM portal reached 6.8 crore by September 2025, marking an 18 percent increase in just a few months. Formal registration has helped enterprises gain easier access to credit, government schemes, and digital financial services, while also improving transparency and data availability.
Credit growth to micro and small enterprises expanded 12 percent year-on-year, outpacing overall system credit growth. This reflects sustained lending appetite at the grassroots level and reinforces the role of formalisation in unlocking financing opportunities.
Operational Pressures Persist
Despite these positive trends, MSMEs continue to face operational challenges. Working capital cycles have lengthened across several manufacturing segments due to higher inventory requirements and slower turnover. In industries such as automobiles, chemicals, and electrical equipment, net working capital cycles now range between 63 and 103 days, increasing liquidity pressure—particularly for smaller firms.
Additionally, rising imports of low-cost goods and weak global demand have squeezed margins for micro enterprises in sectors such as auto components, chemicals, and electrical equipment. These pressures highlight the need for productivity gains, cost optimisation, and differentiation through quality and innovation.
Profitability Remains Uneven
Profitability indicators present a mixed picture. Interest coverage ratios remain healthy in several MSME-heavy sectors such as automobiles and education, while service-oriented sectors including healthcare and hospitality have shown improvement. However, debt service coverage ratios remain below 1x for most sectors, indicating continued strain in servicing debt amid elevated interest rates and ongoing capital expenditure needs.
External Risks and the Road Ahead
Looking ahead, external risks are rising. Trade uncertainties, including tariff-related pressures in key export markets, could affect export-oriented MSMEs in textiles, gems and jewellery, auto components, and agri-marine products. Managing these risks will require sharper financial monitoring, diversification of export markets, and stronger risk assessment frameworks.
Even so, the outlook for FY26 remains cautiously optimistic. Continued formalisation, improving asset quality, and robust credit growth provide a strong foundation for the sector. For entrepreneurs, the focus will increasingly be on scaling sustainably, strengthening financial discipline, adopting technology, and building resilience against global shocks.
A Defining Moment for Indian Entrepreneurship
India’s MSME sector is no longer defined solely by survival—it is shaping the country’s growth narrative. Rising exports, stronger balance sheets, and expanding access to finance point to a sector that is evolving in scale, sophistication, and confidence.
As India’s economic ambitions grow, MSMEs will remain central to job creation, innovation, and inclusive growth—making this moment a defining chapter in the story of Indian entrepreneurship.