• US tariffs introduced in May 2025 have intensified pressure on Indian MSMEs, especially those in high-export sectors like textiles, electronics, and gems & jewellery.
• Ongoing India–US trade negotiations offer a temporary pause, but uncertainty continues to disrupt MSMEs’ planning and pricing strategies.
• Diversifying export markets, improving operational efficiency, and strengthening domestic supply chains are critical resilience strategies.
• Leveraging digital tools, government support schemes, and industry associations can help MSMEs weather current disruptions and position for long-term growth.
  

The United States remained India’s largest trading partner in 2024, with total bilateral goods trade reaching approximately $129.2 billion. 

US exports to India stood at $41.8 billion—an increase of 3.4% ($1.4 billion) from 2023—while imports from India rose by 4.5% to $87.4 billion. Amid these strong business ties, the new tariffs implemented by the US in April 2025 have significantly affected Indian exporters, particularly MSMEs. 

Shrinking profit margins, delayed payments, and order cancellations have added pressure—especially in high-stakes sectors like gems and jewellery (contributing $9 billion in U.S. exports), textiles ($6 billion), auto parts ($2 billion), and electronics ($14 billion). Although susceptible to fluctuations in international trade policies, Indian MSMEs can adopt proactive strategies and strategically utilizing available support mechanisms to navigate the evolving tariff landscape and foster long-term resilience.

Before formulating effective responses, Indian MSMEs must understand the specifics of the current tariff scenario and its immediate consequences. 

Understanding the Current Tariff Scenario and its Direct Impact

In early April 2025, the US announced a two-tier tariff structure:

• April 5, 2025: A universal 10% tariff was imposed on imports from most countries, including India
• April 9, 2025: An additional 27% tariff specifically targeting Indian goods was implemented.
  

These tariffs are in addition to existing duties, such as the 25% tariffs on steel, aluminum, and auto parts. Certain sectors were exempted from these new tariffs, including pharmaceuticals, semiconductors, energy products, and copper. But the sectors most affected by the new tariffs include:

• Textiles and Garments: India’s textile industry, a significant exporter to the US, faces increased costs and reduced competitiveness.
• Automobile Parts: Tariffs on auto components impact India’s auto parts manufacturers, many of which are MSMEs.
• Marine Products: Seafood exporters are experiencing decreased demand due to higher prices resulting from tariffs.
• Furniture: Indian furniture exporters are facing challenges in maintaining their market share in the US.
• Steel and Aluminum: Existing tariffs continue to pressure these industries, affecting MSMEs involved in metal fabrication.

The financial implications for Indian MSMEs due to these tariffs are significant. Approximately ₹21,800 crore in loans held by vulnerable MSMEs and mid-corporates are at risk due to the increased trade barriers. This underscores the potentially precarious financial state of many smaller enterprises facing increased export costs. 

Several financial metrics illustrate the vulnerability of MSMEs. Their low interest coverage ratio indicates a limited capacity to service debt obligations from earnings. High leverage signifies a significant reliance on borrowed capital, increasing susceptibility to economic shocks. Furthermore, their typically low Return on Equity (ROE) suggests lower profitability, providing less buffer to absorb increased costs such as tariffs.

These challenges are compounded by the working capital constraints often experienced by MSMEs and their limited capital expenditure (capex) intensity, which restricts their ability to adapt or invest in efficiency enhancements. These vulnerabilities are further aggravated by the ongoing phase of trade negotiations between the US and India, which introduces complexity for MSMEs. 

Challenges and Uncertainties for MSMEs During Negotiations

India and the US are engaged in ongoing trade negotiations to address the above-related tariff issues. During this period, a 90-day pause on new tariff hikes is in effect, providing a window for potential resolution. Meanwhile, there are factors compounding the environment of uncertainty and impeding long-term business planning:

1. Pressure from US Customers

Indian exporters, particularly MSMEs, are facing pressure from US customers to absorb the increased costs resulting from tariffs. This demand places additional strain on already thin profit margins, forcing difficult decisions about pricing and profitability.

2. Risk of Retaliatory Tariffs 

If India decides to respond to U.S. tariffs by imposing its own tariffs on American goods—a move known as a retaliatory tariff—it could create more challenges for Indian MSMEs. Many small businesses depend on importing certain raw materials, machinery, or components from the U.S. If those items become more expensive due to India’s counter-tariffs, it could disrupt production, increase costs, and further squeeze already tight profit margins. While these actions are meant to balance trade relations, they can end up hurting domestic businesses in the short term.

3. Supply Chain Disruptions

The possibility of supply chain disruptions is another significant concern, particularly for sectors dependent on specific raw materials or components sourced from the United States.

The dynamic nature of the negotiation process and the lack of clarity regarding long-term tariff structures pose a considerable obstacle for MSMEs. Without a clear understanding of the future trade landscape, these businesses face difficulties in making informed decisions regarding pricing strategies, market investments, and overall business planning. This uncertainty can impede decision-making and hinder their ability to compete effectively in the international market.

Despite these challenges, Indian MSMEs can implement proactive and strategic solutions to navigate this period of uncertainty and build long-term resilience. 

Navigating the Uncertainty: Actionable Solutions for Indian MSMEs

To build resilience and adapt to the changing trade environment, Indian MSMEs can consider the following strategies: 

1. Diversify Export Markets 

Reducing dependence on the US market is crucial. Exploring alternative markets such as the UK, Latin America, Africa, Southeast Asia, New Zealand, and Australia can open new opportunities. For instance, the recent India-UK Free Trade Agreement, signed on May 6, 2025, eliminates tariffs on 99% of Indian exports to the UK, providing a significant boost for sectors like textiles and gems.  

While initial market entry may involve some margin pressures due to marketing and logistical investments, a well-researched and strategic approach can yield significant long-term benefits. This includes understanding specific market demands and preferences, adapting products as necessary, and establishing robust distribution networks. Participation in international trade fairs and exhibitions focused on these regions can provide valuable market insights and networking opportunities.  

2. Develop Domestic Supply Chains 

Reducing reliance on potentially tariffed imported inputs by developing stronger domestic sourcing is a strategic move towards building resilience. MSMEs should actively explore local alternatives for raw materials, components, and other inputs. This not only mitigates the risk of tariff-induced cost increases but also strengthens the domestic economy. 

Encouraging collaboration within the Indian industry to build resilient supply networks is also vital. This could involve forming consortia or partnerships to collectively source materials, share resources, and enhance bargaining power. Government initiatives promoting domestic manufacturing and reducing import dependence should be actively leveraged. 

3. Exploring Options for Shared Cost Burden or Value-Added Services: 

Where feasible, MSMEs should explore options to share the cost burden of the tariffs with their international buyers. This could involve negotiating price adjustments or offering incentives for absorbing a portion of the increased costs. 

Alternatively, MSMEs can focus on enhancing their offerings by providing value-added services such as superior after-sales support, customized solutions, or expedited delivery times. These enhancements can justify their pricing and make their products more attractive to international buyers, even with the added tariff burden. 

4. Encouraging Collective Bargaining Through Industry Associations: 

Industry associations play a significant role in representing the interests of MSMEs. These associations can facilitate collective bargaining with international buyers or advocate for policy adjustments with both the Indian and US governments. By working collaboratively, MSMEs can have a stronger voice and potentially negotiate more favorable terms. 

Associations can also provide valuable resources, market intelligence, and networking opportunities to assist their member MSMEs in navigating the challenges of international trade. 

5. Embracing Quality Standards, Patents, and Certifications: 

Adhering to international quality standards and obtaining relevant certifications can significantly enhance the credibility and marketability of Indian MSME products in global markets. Compliance with these standards assures international buyers of the quality and reliability of the products, potentially justifying higher prices and building long-term trust. 

In addition to quality benchmarks, securing patents for innovative products, processes, or designs can give MSMEs a competitive edge. Patents protect intellectual property, deter imitation, and open up opportunities for licensing or strategic partnerships—especially important when entering global markets. 

MSMEs should identify the specific quality standards and certifications relevant to their target markets and invest in the processes and systems required to achieve them. 

6. Seeking Expert Guidance and Utilizing Government Support: 

Navigating the complexities of international trade and tariffs can be challenging. MSMEs should actively seek expert guidance from trade consultants, legal professionals, and financial advisors to understand the implications of the tariffs and develop effective strategies. 

Furthermore, MSMEs should actively utilize the various government support schemes, such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the Micro and Small Enterprises Cluster Development Programme (MSE-CDP), and export promotion programs like Export Promotion Councils (EPCs). These programs often provide financial assistance, market entry support, and guidance on trade regulations. Staying informed about these initiatives and leveraging them effectively can significantly aid MSMEs in building resilience. 

7. Investing in Innovation and Product Diversification: 

To reduce vulnerability to price competition and tariff pressures, MSMEs should focus on research and development (R&D) to create unique, high-value products. Investing in innovation can lead to the development of products with distinct features or technological advantages that command premium pricing and are less susceptible to tariff-related price sensitivities. 

Furthermore, diversifying product portfolios to cater to a wider range of international markets and customer needs can enhance resilience. By offering a broader array of products, MSMEs can reduce their dependence on specific product categories that might be heavily impacted by tariffs in a particular market. 

8. Building Digital Capabilities and Online Presence: 

In today’s interconnected world, establishing strong digital capabilities and an effective online presence is crucial for reaching new markets and streamlining operations. MSMEs should invest in developing user-friendly websites, engaging in digital marketing, and exploring e-commerce platforms to directly reach international customers.