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Will the US tariff war add to MSMEs’ funding woes?
Articles- Apr 30,25
While Micro, Small and Medium Enterprises (MSMEs) continue to face barriers in accessing funds (due to high collateral norms, lack of credit history, slow approvals, etc), the new tariff war could add to their financial woes, says Rakesh Rao.
On April 2, 2025, the US President Donald Trump announced a minimum 10 per cent tariff on all US imports, effective April 5, and higher tariffs on imports from 57 countries (including India) sending a shock wave across the globe. "Export-oriented Micro, Small and Medium Enterprises (MSMEs) are facing challenges due to global uncertainties. Delays in shipments, extended payment terms, and inventory pile-ups are straining their cash flows. Many MSMEs export indirectly by supplying to larger companies. If these larger entities face export hurdles, the ripple effect impacts the MSMEs. Additionally, the complexities of direct exporting—like compliance and currency fluctuations—deter many MSMEs from venturing into global markets independently,” says R Srinivasan, Director, AIRA Consulting Pvt Ltd.
The current tariff war couldn’t have come at a more delicate time for the global economy. Growth was already under pressure, with recession fears looming large across major markets. J.P. Morgan recently raised the probability of a global recession to 60 per cent, and the IMF has downgraded global growth forecasts to 2.8 per cent this year, down from 3.3 per cent last year. "For Indian MSMEs, which account for nearly 49 per cent of the country’s exports, these headwinds present both risks and opportunities. The US, one of India’s largest export destinations, alone absorbs about $87 billion worth of goods. With tariffs driving up costs in the US, demand for imported goods could soften, affecting Indian exporters too. Rising input costs and global supply chain volatility add another layer of complexity,” observes Sanjay Agarwal, CEO, Ambit Finvest Pvt Ltd.
However, there’s a silver lining. Differential tariffs are creating a unique cost advantage for Indian MSMEs. He explains, “With countries like China, Vietnam, and Bangladesh facing steeper tariffs compared to India, our businesses have a real opportunity to expand their footprint, especially in sectors like electronics and textile manufacturing. The global supply chain realignment also opens doors for Indian MSMEs to position themselves as reliable partners on the world stage."
Sanjay Agarwal adds, “At Ambit Finvest, we are closely tracking these shifts. We are recalibrating our sectoral strategies to ensure we are ready to back MSMEs in sectors and geographies where opportunity is brewing. Our role is clear — to move quickly, provide timely capital, and help our MSMEs capitalise on the opportunities."
US tariff tantrum
The recent decision by the US administration to pause the imposition of higher tariffs for 90 days on countries including India offers a welcome, albeit temporary, relief. Ramaswamy Iyer, Founder and CEO, Vayana Network, says, "For now, Indian exports to the US face only a 10 per cent base ad valorem tariff, rather than the steeper 26 per cent that was initially announced. However, for India’s MSMEs—many of which are heavily dependent on the US market—the uncertainties around global trade policy continue to influence their financial and operational planning."
India’s MSME exporters are more engaged in global trade than ever before. The number of exporting MSMEs has surged from 52,849 in 2020–21 to over 1.73 lakh in 2024–25, reflecting the sector’s growing role in international commerce. Their contribution to India's exports rose to 45.79 per cent by May 2024, up from 45.73 per cent the previous year—a clear indicator that MSMEs are not only central to India’s domestic economy but also to its global trade performance.
Table 1: MSMEs exploring global market
Year | Number of MSME exporters |
2020-21 | 52849 |
2024-25 | 1,73,350 |
Iyer elaborates, "This expanding global footprint also means greater vulnerability to policy shocks. Even with the 90-day tariff suspension, buyers in the US are hesitant to commit to long-term contracts, uncertain about whether higher duties might return. For MSMEs, this translates into: Delayed payments and postponed shipments disrupting cash flow cycles; Inventory pile-ups, as goods meant for export remain stuck; Greater need for short-term working capital, often without the assurance of corresponding receivables; and Pressure on margins, as businesses must decide whether to absorb tariff costs or renegotiate contracts."
The impact is particularly pronounced in sectors like gems and jewellery, electronics, machinery, and garments, where MSMEs dominate the supply chain. These are also sectors with thin profit margins, leaving very little room to manoeuvre in the face of trade volatility. "What complicates matters further is that many MSMEs operate with single-market exposure. The US accounts for nearly 18 per cent of India’s total exports, making any disruption in that corridor especially consequential. Even a base 10 per cent tariff—if perceived as a long-term structural change—can erode competitiveness and force MSMEs to either accept tighter margins or seek financing to manage operational continuity,” opines Iyer.
Perhaps the most significant impact is not the tariff itself, but the uncertainty it introduces. He explains, “For MSMEs, particularly those without geographic diversification or deep financial reserves, uncertainty affects everything—from creditworthiness assessments to the timing of raw material purchases and production planning."
Need flexibility in credit
According to Madan Sabnavis, Chief Economist, Bank of Baroda, as MSMEs account for a large proportion of exports which can be as high as 40 per cent any setback on the exports front due to the tariffs will impact their business as well as profitability. “Therefore, their financing needs become even more critical as they seek new export markets or substitute the potential loss of turnover through domestic means,” he says.
In this climate of flux, the financial needs of MSMEs are evolving rapidly. They require flexible credit, faster disbursals, and more dynamic risk assessment models that account for external trade shocks. Even MSMEs with solid fundamentals may find themselves in need of urgent working capital to deal with longer sales cycles, renegotiated contracts, or higher logistics costs. "Financial institutions and lenders must now account for this evolving external risk in their underwriting models. For MSMEs, this period demands agility, real-time access to working capital, and constant recalibration of financial planning. Whether the higher tariffs are reimposed after 90 days or whether a trade deal intervenes will shape how India’s MSMEs plan their export strategies and financial needs for the rest of the year,” says Iyer.
The changing global dynamics will need policy adjustments or institutional support for MSMEs. “While large exporters have the cushion to absorb global shocks, MSMEs are far more vulnerable. We need more robust export credit support mechanisms tailored for MSMEs. Also, procedural handholding, for example, simplifying documentation and ensuring timely realisation of export payments, can make a big difference. Schemes like ECGC (Export Credit Guarantee Corporation) need to become more MSME-friendly in terms of both cost and access. Government-to-government trade arrangements can also help provide stable channels for MSME exports, insulating them from sudden market swings,” suggests Srinivasan.
US Tariff
MSMEs
Madan Sabnavis
Bank of Baroda
R Srinivasan
AIRA Consulting
Sanjay Agarwal
Ambit Finvest
Ramaswamy Iyer
Vayana Network
MSME Finance
MSME loans
SME loans
Rakesh Rao
Exports to US
MSME exporters
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