Indian MSMEs Post Best Performance Since Pre-Pandemic Era, Though Cost Pressures Loom

Indian micro, small and medium enterprises (MSMEs) have bounced back to their best performance since 2019, with nearly four-fifths of businesses expanding last year, substantially outpacing their regional counterparts. Yet this promising trajectory faces headwinds from mounting cost pressures that threaten to constrain future expansion.

The CPA Australia Asia-Pacific Small Business Survey 2025/26 reveals that 80 per cent of Indian small businesses expanded in 2025, nearly double the Asia-Pacific regional average of 63 per cent. This momentum is expected to continue, with 87 per cent of Indian entrepreneurs projecting growth in 2026 and 84 per cent confident about the broader economy's trajectory—both figures significantly ahead of regional benchmarks.

Customer experience improvements and technology adoption emerged as the primary catalysts driving this expansion. Nonetheless, the survey underscores persistent challenges: 42 per cent of respondents identified escalating expenses as their paramount concern, with material costs remaining the most troublesome cost factor for the third consecutive year.

Aniket Talati, a Certified Practising Accountant and CPA Australia's India spokesperson, attributed the sector's resilience to robust domestic demand and supportive government frameworks. "Indian MSMEs have demonstrated remarkable ambition to scale operations backed by strong internal consumption. Bolstered by policy measures fostering structured, growth-focused enterprises and trade agreements opening new markets to offset tariff challenges, the sector exhibited considerable vitality last year and approaches 2026 with ambitious expansion plans," Talati explained.

However, he cautioned that the business landscape is becoming more complicated. Escalating geopolitical tensions since March have introduced fresh uncertainty, particularly affecting manufacturing and export-focused enterprises grappling with elevated energy and logistics expenses, surging raw material prices and unpredictable demand. The weakening rupee has provided some relief through improved export competitiveness, but businesses must prioritise strategic planning, disciplined expense management, renewable energy investments and robust risk frameworks to sustain momentum.

Employment Generation Accelerates

Indian MSMEs continue serving as employment engines, with 52 per cent of surveyed businesses adding staff in 2025. This trend is projected to intensify, with 69 per cent planning workforce expansion in 2026, outperforming most regional counterparts.

A defining characteristic of India's MSME landscape is its youthful entrepreneurial base. More than half of Indian small business proprietors—56 per cent—are under 40 years old, compared to just 38 per cent across the Asia-Pacific region. This demographic advantage is translating into competitive strength through faster technology adoption, greater innovation and more agile business models.

Digital Adoption Reaches New Heights

The sector is experiencing rapid digital transformation. In 2025, 89 per cent of Indian small businesses generated more than 10 per cent of revenue through digital payment channels—the highest proportion in Asia-Pacific. Three-quarters earned over 10 per cent of revenue from e-commerce sales, while nine in ten leveraged social media for commercial purposes.

Artificial intelligence investment has surged notably, rising from 26 per cent of businesses in 2024 to 36 per cent in 2025, making it the leading technology investment priority. Cloud computing (35 per cent) and customer relationship management systems (30 per cent) follow closely. Remarkably, 41 per cent now consult AI tools for business guidance, up sharply from 25 per cent the previous year. Many enterprises report that technology spending has bolstered profitability, validating the business case for digital investment.

This technological momentum is fuelling product and service innovation, with 44 per cent of MSMEs planning to launch new offerings in 2026, substantially exceeding the survey average of 29 per cent.

Rising Cybersecurity Threats

Accelerating digital adoption has expanded vulnerability to cyber threats. While 59 per cent reviewed cybersecurity measures in the latter half of 2025, 47 per cent experienced operational disruptions from security incidents during the year. Half of Indian MSMEs anticipate experiencing a cyberattack in 2026—both figures exceeding Asia-Pacific averages.

Talati highlighted that government initiatives are facilitating digital and international expansion. Programmes like TEAM (Trade Enablement and Marketing) under RAMP (Raising and Accelerating MSME Performance) are helping enterprises access ONDC digital storefronts, payment systems and logistics without substantial capital investment. Growing AI adoption promises productivity gains rather than workforce displacement, though strengthening cybersecurity practices and data literacy remain imperative for safe digital economy participation.

Finance Accessibility Improves

External financing demand strengthened considerably, with four in five Indian MSMEs seeking external capital in 2025, up from 72 per cent in 2024. Encouragingly, 53 per cent reported that accessing finance was straightforward or very straightforward, signalling improved lending conditions. Business expansion was the primary financing driver for 69 per cent of respondents, far exceeding those seeking funds to manage rising costs or ensure survival.

Banks remain the predominant funding source, supplemented by family capital, investor backing and non-bank financial institutions. Talati stressed that combining accessible finance with prudent financial stewardship will be essential for MSME growth. Targeted investments in skilled workforce development and technology adoption will sustain competitiveness. Platforms like TReDS (Trade Receivables Discounting System) are accelerating working capital access through receivables discounting from corporate and government clients. The newly launched Emergency Credit Line Guarantee Scheme 5.0 offers additional financing relief, helping enterprises navigate pressures stemming from regional geopolitical conflicts.

The survey gathered responses from 513 Indian enterprises among 4,166 small businesses across 11 Asia-Pacific markets during November and December 2025.