Union Budget 2025-26: MSMEs Set to Soar

New MSME Classification Criteria for MSMEs

Do you feel your business is too large to be considered a micro-enterprise but not big enough to compete with big companies? The Indian government has updated the criteria for Micro, Small, and Medium Enterprises (MSMEs) to help businesses grow more smoothly.
As per the new criteria for MSMEs, the investment limit for MSME classification will be increased 2.5 times, while the turnover threshold will be doubled.
The table below summarizes the change in criteria as per the new definition of MSME.

These changes will create a more inclusive growth environment where businesses can transition smoothly without regulatory hurdles.

Why does this matter?

• More businesses will now qualify as MSMEs, unlocking easier access to credit, subsidies, and government contracts.
• The government's Credit Guarantee Schemes for MSMEs will now apply to a wider range of firms, enabling easier access to both secured and unsecured business loans.
• Growing firms will not have to fear losing their MSME benefits if they scale up.
• Expect a ripple effect: higher job creation, greater market competition, and stronger economic contributions from the sector.

With the MSME threshold expansion, we can potentially add 5-7 million more jobs in the next five years. So, if your business is on the cusp of expansion, now is the perfect time to re-evaluate your growth strategy and tap into new benefits.

Cutting through the red tape: Ease of doing business

Navigating the maze of regulations, licenses and certifications could sometimes feel like running a marathon in quicksand. A recent World Bank report on Ease of Doing Business ranked India 63rd among 190 nations, with MSMEs citing regulatory hurdles as a top barrier to growth. The Union Budget 2025-26 aims to alter that by announcing a high-level committee dedicated to simplifying regulatory processes. The committee will aim to strengthen trust-based economic governance, ensuring a more business-friendly environment.

What's in it for MSMEs?

• Fewer bureaucratic hurdles mean faster approvals and less paperwork.
• Reduced compliance costs free up capital for core business operations.
• More streamlined processes can encourage foreign and domestic investors to partner with Indian MSMEs.

Fueling growth: Bigger and better credit access

Lack of credit has long been the Achilles heel for MSMEs, holding back their growth potential. But the announcements made in the budget could really prove transformational.

The Key Announcements:

• Enhanced Credit Guarantee: The government has doubled the credit guarantee cover under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) from currently Rs. 5 Crore to Rs. 10 crore, unlocking Rs. 1.5 lakh crore in additional funding over the next five years. This move will encourage Banks and NBFCs to provide more business loans to micro and small businesses, providing them with the much-needed capital for growth.


• Customized Credit Card for Micro-Enterprises: A Rs. 5 lakh limit-tailored credit card exclusively for micro-enterprises, with 10 lakh cards expected to be issued in the next five years. This will provide businesses with instant access to working capital, fostering growth and stability.


• ₹10,000 Crore Fund of Funds for Startups: A game-changer for innovation-driven MSMEs and Start-ups looking to scale and compete globally, which complements the government's existing ₹10,000 crore contribution. These funds are routed through venture capital funds or Private Equity Funds or some special purpose funds (daughter funds). These daughter funds, invest these funds along with their own capital into MSMEs and Startups in the form of debt or equity or a combination of both.
  Building on the success of the existing corpus of Rs. 10,000 Crore which attracted investment commitment of around Rs. 91,000 Crore from various funds, the government announced an additional infusion of Rs. 10,000 Crore in the fund of funds which is expected to boost the access to growth capital for Start-ups and MSMEs.


• Empowering Women Entrepreneurs: Special support for 5 lakh first-time women entrepreneurs from Scheduled Castes and Scheduled Tribes, offering up to ₹2 crore in term loans along with online training. This is indeed a significant step towards gender inclusivity in business.


• Boosting MSME Exports: A new term loan scheme has been announced for offering up to ₹20 crore to MSME exporters. This will strengthen their global competitiveness and expand India's footprint in international trade.

The RBI reports that only around 16% of MSMEs in India have access to formal credit in the form of business loans. With these measures, the government aims to increase credit penetration to at least 25% by 2028, unlocking an estimated Rs.5 lakh crore in economic activity.

What this means for you:

• If you have been holding back on expansion due to a lack of funds, now is the time to reconsider. Approach your lenders for business loans to expand your business.
• Women entrepreneurs can access dedicated financial and educational support, making business ownership more accessible.
• Export-focused MSMEs can tap into global markets with better financial backing.

Putting more money in consumers’ hands: Tax reforms that matter

The direct tax reforms introduced in this budget would leave more disposable income, estimated to be around Rs. 1 lakh Crore, with the consumers. Higher disposable income with consumers means higher demand for MSME goods and services. This is expected to address, to some extent, the slowdown in consumption witnessed amongst urban consumers over the last few months.

Stability matters: Fiscal prudence and MSME growth

Businesses thrive in a stable macroeconomic environment. In this budget, the government has reaffirmed its commitment to macroeconomic stability by staying on course to progressively reduce the fiscal deficit and maintain inflation control. India is well on track to attain a fiscal deficit to GDP ratio below 4.5% in FY 2025-26.

How this helps MSMEs:

• Stability attracts more investment into the sector.
• Inflation control ensures raw material costs don't spiral out of control.
• A balanced fiscal approach means better long-term economic conditions for businesses.

MSMEs should leverage this stability to plan long-term strategies, focusing on sustainable growth rather than short-term survival.

What should MSMEs do now?

• Assess your MSME status: If your business qualifies under the revised definition of MSME, start with exploring the incentives and Credit Guarantee schemes which now become available for your business.
• Adapt to regulatory changes: Stay informed and leverage the upcoming reforms around ease of doing business.
• Prepare to capitalize on enhanced demand: Especially if you are in a consumption-driven business (like FMCG), you might witness an enhancement in demand due to direct tax reforms announced by the government. Maintain optimum stocks and keep your supply chain aligned.

The Big Question
Will MSMEs fully capitalize on these reforms, or will execution challenges hold them back? The answer lies in proactive strategy and adaptability. What is your next move?

Frequently Asked Questions (FAQs)

1. What is the new classification of MSME?
   The Union Budget 2025-26 has increased MSME investment limits by 2.5 times and turnover thresholds have been doubled. For example,
   • The investment limit for micro-enterprises is now ₹2.5 crore, and the turnover limit is ₹10 crore.
   • The investment limit for small-enterprises is now ₹25 crore, and the turnover limit is ₹100 crore.
   • The investment limit for medium-enterprises is now ₹125 crore, and the turnover limit is ₹500 crore.
   This would ensure that the benefits under MSME schemes would now be available for a larger number of companies. This would also support a smoother transition for growing businesses.


2. What is the new credit guarantee cover for micro and small enterprises in India?
   The credit guarantee cover for micro and small enterprises under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has been enhanced from ₹5 crore to ₹10 crore, aiming to unlock an additional ₹1.5 lakh crore in credit over the next five years.


3. What initiative was announced for micro-enterprises in terms of credit access?
   Customized credit cards with a ₹5 lakh limit for micro-enterprises registered on the Udyam portal will be introduced, with plans to issue 10 lakh such cards in the first year. This would enable easy and instant access to working capital for micro-enterprises.


4. What new financial support was announced for startups in the Union Budget 2025?
   A new Fund of Funds with a government contribution of ₹10,000 crore was set up to support startups, adding to the existing fund of ₹10,000 crore which has attracted investment commitments of over ₹91,000 crore. This would provide the much needed boost to growth capital for the Start-ups and MSME ecosystem.


5. What are the government’s initiatives for women entrepreneurs in MSMEs?
   A new scheme will provide term loans up to ₹2 crore to 5 lakh first-time women, Scheduled Castes, and Scheduled Tribes entrepreneurs over the next five years, including online capacity building for entrepreneurship and managerial skills.


6. What support was announced for MSME exporters in the Union Budget 2025?
   A new term loan scheme has been announced for offering up to ₹20 crore to MSME exporters. This will strengthen their global competitiveness and expand India's footprint in international trade.