Union Budget 2026: Why India’s MSMEs Need Structural Reform, Not Sops?

As India heads into Union Budget 2026, the spotlight is firmly on growth, employment generation and fiscal discipline. Yet, one structural reality is becoming increasingly clear - India's MSME sector has evolved far more rapidly than the policy frameworks designed to support it.

"From our experience of working closely with MSMEs across the country, today's enterprises are increasingly digital-first, service-oriented and data-driven. However, much of the existing policy architecture continues to reflect a manufacturing-heavy, asset-led view of the sector. Pre-Budget discussions across industry forums suggest a growing consensus: the next phase of MSME growth will depend less on short-term stimulus and more on structural facilitation," said Ritesh Jain, Co-founder, FlexiLoans.com.

Scaling Credit Guarantee Frameworks - Credit guarantee schemes have played a pivotal role in expanding formal credit access for MSMEs. That said, their reach remains limited relative to the scale and diversity of MSME borrowing needs. This has emerged as a key theme in pre-Budget conversations.

There is a strong case for:

• Broadening guarantee coverage to include a wider set of regulated lenders, including NBFCs
• Reviewing interest rate and credit-rating thresholds that exclude otherwise creditworthy borrowers with healthy repayment behaviour
• Enhancing applicability for working capital loans, which account for a majority of MSME credit demand.

The emphasis now should be on improving the usability, inclusiveness and effectiveness of existing schemes rather than launching new ones.

Bringing Service MSMEs into Policy Focus -India's MSME ecosystem is no longer manufacturing-dominated. A growing share of enterprises operates in services - spanning logistics, digital commerce, professional services and platform-led businesses. Aligning policy with India's consumption- and services-led economy will be critical to sustaining MSME growth.

Simplifying Compliance to Unlock Credit Flow -Despite progress, documentation and compliance complexity continue to constrain MSME access to timely credit. Encouragingly, policy discussions are increasingly centred on simplification.

Key areas that merit attention include:

• Recognising loans routed through current accounts as MSME loans for scheme eligibility
• Greater reliance on GST data, bank statements and Account Aggregator frameworks
• Reducing duplicative documentation without compromising regulatory oversight
• Such measures could significantly reduce turnaround times and lower operational friction for both lenders and borrowers.

Looking Ahead

With global borrowing costs remaining elevated, the focus is gradually shifting toward targeted interest support mechanisms and blended finance structures, rather than broad-based subsidies. At the same time, technology is increasingly being viewed as policy infrastructure - enabling transparency, resilience and formalisation across the MSME ecosystem.

"The narrative ahead of Budget 2026 is clear. Credit access, sector inclusion, cost efficiency and digital enablement must move in tandem. Budget 2026 presents a timely opportunity to recalibrate MSME policy to reflect the sector's evolving reality and support sustainable, long-term growth," commented Ritesh Jain.