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MSMEs Under Strain From US Reciprocal Tariffs

5 April 20251 min read
ECONOMYMSMEs UnderStrain From USReciprocal Tariffs5 April 2025safalsetu.com

Why in the news

US reciprocal tariffs raised worries for Indian MSMEs that sell abroad, and banks led by SBI began thinking about ways to share lending risk.

Key facts

  • Most exposed sectors: textiles, auto components, gems & jewellery, which have little financial cushion against global shocks.
  • Pharmaceuticals are presently exempt from reciprocal tariffs.
  • Exports to the US are about 4% of GDP; they have been falling since FY23.
  • The top 15 export items make up 63% of US-bound trade.
  • The tariff on India was trimmed by one point to 26%, giving only slight short-term relief.

Bank credit to MSMEs (RBI, February 2025)

SegmentCredit outstandingAnnual growth
Micro and small units₹7.84 trillion9.7%
Medium firms₹3.52 trillion18.1%

Ideas under discussion

  • State-run lenders including SBI may seek changes to credit guarantee schemes, possibly in talks with the Centre.
  • Possible asks: better CGTMSE coverage terms, more flexible repayment structures, and interest subvention for hit exporters.
  • Aim: comfort for lenders while MSMEs still get working capital.
  • Coordinated action plans by industry bodies, banks and government are expected after more data arrives in about a fortnight.

Concerns

  • SBI Research flags risks from slower global growth, volatile financial markets and unpredictable US policy.
  • Quality and risk appetite of MSME loans could change if uncertainty or export decline persists.

Way forward

  • Revised export-financing norms and sector-specific fiscal incentives.
  • Better logistics and compliance support to cut costs.
  • Wider export markets, higher productivity, and steady bilateral trade policy.
  • Indian SMEs may even gain an edge over Chinese exporters, who face higher US tariffs.

Exam angle

  • Scheme in focus: CGTMSE (credit guarantee for micro and small enterprises).
  • India’s reciprocal tariff: 26% after a one-point cut.
  • Exempt sector: pharmaceuticals.

Test yourself

1. Which sector was noted as exempt from US reciprocal tariffs in the MSME tariff-shock coverage?

Pharmaceuticals are exempt, while textiles, auto parts and jewellery are exposed.

2. As per RBI data for February 2025, credit to medium-sized firms grew by what percentage year-on-year?

Medium-firm credit of ₹3.52 trillion rose 18.1% YoY.

3. Lenders considered revising which guarantee scheme to de-risk MSME lending amid tariff shocks?

Coverage terms of CGTMSE were among the items under discussion.