Will Interest Subsidy Redefine MSME Credit in 2026?

We are approaching the Union Budget 2026-27. There is a growing emphasis on the structural deepening in core sectors such as defence, electronics, and exports.

The MSME (Micro, Small, and Medium Enterprises) sector is most important to this deepening. The PHDCCI (PHD Chamber of Commerce and Industry) has identified the MSMEs as the main engine for the 10% economic growth trajectory.

The MSME sector’s footprint is already massive. It contributed 30% to India’s manufacturing output in 2025. Thus, it has emerged as the second-largest employer after agriculture.

In terms of international trade, the MSME sector has maintained a strong presence. Its export share rose from 43.59% in 2022-23 to 45.79% by Jun 2025. Over 7.30 Cr enterprises registered on the Udyam portal between Jul 2020 and Dec 2025.

PHDCCI has suggested capitalising on this momentum by proposing a 2% interest subsidy on new and incremental loans to manage higher borrowing costs. They have also suggested an upward revision of MUDRA loan ceilings.

On the regulatory front, the chamber is seeking to amend Section 44AB of the IT (Income Tax) Act. They suggest exempting micro-enterprises with turnovers up to ₹10 Cr from mandatory tax audits, potentially saving individual units between ₹75,000 and ₹1.5 lakh annually.

Now, the key question for investors is whether market participants are factoring in the potential for a credit-led re-rating of the industrial small-cap segment if these proposals are implemented.

Fiscal Easing for MSME Credit

Many small-scale industries are unable to evolve due to the high cost of capital. A high capital cost is also a barrier to technology adoption by these businesses.

So, there is a broader need to protect domestic manufacturers from volatile global interest rate cycles.

The PHDCCI is suggesting a subsidy on the incremental credit (i.e., an addition to the existing loan). The proposals aim to incentivise capital expenditure. With this incentive, the MSME firms can upgrade to modern, eco-friendly machinery.

Such a move is important for the electronics and defence sectors, as their domestic supply chains still require slow, low-cost capital to compete with established global competitors.

Furthermore, PHDCCI is also recognising the inflationary pressures on project costs over the last decade. It is important to lower the entry barriers for credit. With this, the government could efficiently bridge the gap between innovation and commercialisation.

Need for Structural Reforms

The upcoming Union Budget 2026-27 is aiming to focus beyond credit. It might also rationalise the regulatory burden that currently hinders the export potential of micro-units.

There is a proposal to exempt enterprises below a certain turnover threshold from mandatory tax audits. This can be an important step towards "Ease of Doing Business."

Such exemptions can:

• Save on annual compliance fees
• Free up management bandwidth
• Allow entrepreneurs to focus on product quality and market expansion
• Reduce MSMEs’ administrative paperwork

India is aiming to reduce its reliance on certain foreign suppliers for specific electronics components and defence hardware. For this, India is aiming to build a diverse and tech-savvy MSME base.

Furthermore, the idea of dedicated funds for startups is another aspect to ensure that seed-stage companies in the deep-tech and semiconductor space have the "patient capital" required to withstand long gestation periods.

If implemented, these measures have the potential to transform the MSME sector from a domestic provider to a globally integrated manufacturing powerhouse.

Towards Atmanirbhar Bharat

The above recommendations represent a coordinated effort to align India’s grassroots industrial base with its overarching strategic goals in electronics, defence, and exports.

PHDCCI is addressing the twin pillars of credit accessibility and regulatory simplicity. The proposals are seeking to create a fertile environment for the next generation of industrial leaders.

The success of these interventions will determine if the MSME sector can indeed push the nation towards its long-term growth aspirations. As the first major fiscal event of the year, does the focus on MSME credit and exports provide the necessary fundamental support for India’s mid-cap industrial index in 2026?

Source

CNBC TV18
Economic Times