Tariff tempest: Why US duties could sink Indian MSMEs—and hit microfinance

Tariff shock

The US, India’s largest export market, has slapped a 50% duty on imports ranging from textiles, gems and jewellery, leather, footwear to shrimps and fisheries. These are precisely the industries that employ millions of micro borrowers. With export orders drying up and factories slashing production, MSMEs face layoffs and closures — a direct threat to microfinance institutions that depend on their repayment cycles.

The exposure is stark: 80% of India’s shrimp exports head to the US, almost 90% of solar module exports, a third of textiles, apparel and gems, plus $17 billion of engineered goods such as auto parts. While US exports make up just 2% of India’s GDP, Goldman Sachs pegs the actual hit at around 0.6%, thanks to exemptions on sectors like pharma and electronics.

S. Mahendra Dev, chairman of the Economic Advisory Council to the Prime Minister, admitted the bigger risk lies in jobs, not growth. India has an estimated 63.39 million unincorporated, non-agriculture MSMEs, according to ministry data. Micro units account for over 99% of them, with half based in rural India. Together, they provide 110 million jobs—over a quarter to women.

Despite the looming threat, the government’s response so far lacks urgency. While it has promised support to exporters, discussions with financial institutions, possible GST tweaks and quicker refunds, timelines remain unclear. Market diversification efforts are underway, but MSMEs need immediate help to prevent closures and layoffs.

Pandemic playbook

While new trade partnerships and market diversification are important, what India needs right now is urgent intervention—similar to the measures deployed during Covid shutdowns and supply chain disruptions—to keep factories running and jobs intact.

Policymakers don’t need to reinvent the wheel. Reworking pandemic-era playbooks could help cushion the blow. The government can start by identifying vulnerable exporters—traceable through HSN codes in trade data—and rolling out targeted support so that small manufacturers not only stay afloat but also avoid mass layoffs while they retool products and seek new buyers.

One option is to revive the Emergency Credit Line Guarantee Scheme. The caps and tenure can be shorter, but the credit could be tied to payroll retention, ensuring that firms maintain a high share of their pre-tariff workforce.

Exporter associations have also sought interest subvention, which could be tied to headcount retention. Similarly, the Atmanirbhar Bharat Rojgar Yojana, under which the government paid employer and employee provident fund contributions for establishments with fewer than 1,000 staff, could be reactivated to reduce payroll costs while protecting workers.

Relief could be targeted at vulnerable export hubs like Tiruppur’s garment belt, Moradabad’s brassware industry and Surat’s gem and jewellery hub. Covid-style loan moratoriums can also be revived on a shorter horizon.

Covid schemes helped MSMEs stay afloat, save jobs and ensure liquidity. With tweaks, they can again cushion the tariff shock. But liquidity alone won’t suffice. Long-term resilience demands diversifying export markets and moving up the value chain—so Indian producers are not trapped in the low-margin, cost-sensitive segments most vulnerable to global shocks.