India's small and medium enterprises are frequently described as the backbone of the economy, yet for decades policy treated them more as a compliance problem than as a strategic growth engine. That mindset is now, finally, beginning to change. Quiet but consequential regulatory reforms most notably the expanded definition of "small company," simplified compliance structures, digitised filings, and improved access to formal credit signal a long-overdue recognition that SMEs are not a welfare constituency. They are India's most scalable strategic asset. As the country advances toward a five-trillion-dollar economy and seeks to position itself as a reliable manufacturing and services alternative in an increasingly fragmented global order, the Indian SME Growth Agenda 2026 must be framed not around protection or relief, but around power competitive power, technological power, and global market power.
India today hosts over sixty-three million MSMEs, contributing nearly thirty percent of GDP, close to forty-five percent of manufacturing output, and providing livelihoods to more than one hundred and ten million people. Beyond these headline numbers, SMEs occupy a far more strategic position. They sit at the intersection of three national imperatives: absorbing employment in a demographically young country, building supply-chain resilience in a geopolitically volatile world, and diffusing innovation beyond a small group of large conglomerates. Yet despite their scale and significance, most Indian SMEs remain sub-optimally productive. Average SME productivity in India is estimated at only thirty to forty percent of large firms, compared to sixty to seventy percent in OECD economies. This productivity gap is neither cultural nor entrepreneurial; it is fundamentally institutional. The Growth Agenda 2026 must therefore focus not on intentions or slogans, but on repairing and redesigning the institutions that shape SME behaviour.
Recent compliance rationalisation particularly the expansion of thresholds under the Companies Act represents a critical inflection point. By raising limits on paid-up capital and turnover, tens of thousands of companies have been released from excessive filings, board requirements, and punitive penalty exposure. This is not a cosmetic administrative change. It alters incentives at the ground level. When founders are not paralysed by procedural fear, risk-taking increases. When compliance becomes proportionate rather than oppressive, formalisation becomes attractive rather than punitive. When management bandwidth is freed from paperwork, capital efficiency improves as attention shifts from regulators to customers and markets. Yet it must be stated clearly: compliance relief is only the opening move. Growth does not automatically follow deregulation. Growth must be deliberately designed.
Credit availability has improved markedly over the last decade through Udyam registration, GST-linked lending, the Account Aggregator framework, and India's broader digital public infrastructure. However, the structure of SME credit remains deeply flawed. Most lending is still working-capital heavy, not growth-capital oriented. Banks continue to lend against invoices and collateral rather than against ambition, innovation, or market expansion. The outcome is survival finance, not scale finance. By 2026, India requires a fundamentally new SME credit architecture that distinguishes clearly between stagnant SMEs low productivity, lifestyle-oriented firms and aspirational SMEs that are export-ready, technology-adopting, and employment-generating. The latter category deserves differentiated interest rates, longer tenures, quasi-equity instruments, and outcome-linked incentives. Without such segmentation, expanding credit volumes will merely inflate balance sheets without building real capabilities.
Equally under-addressed is the question of technology adoption. India produces world-class digital platforms and public digital infrastructure, yet technology diffusion among SMEs remains shallow. Adoption of integrated enterprise systems, AI-driven demand forecasting, cyber security frameworks, quality automation, and advanced analytics is still the exception rather than the norm. A 2024 industry survey revealed that fewer than fifteen percent of Indian SMEs use integrated digital systems beyond basic accounting and GST compliance. The Growth Agenda 2026 must therefore move decisively away from generic "Digital India" rhetoric toward the harder task of technology embedding. This requires tax incentives that reward technology adoption rather than mere capital expenditure, cluster-based shared technology platforms, government-supported SaaS credits for SMEs, and industry-led digital mentorship that replaces bureaucratic workshops. Global experience is unambiguous: SMEs that digitise early do not merely grow faster; they survive longer.
Export orientation must form another central pillar of the agenda. In an era defined by friend-shoring, supply-chain diversification, and geopolitical uncertainty, SMEs are India's most flexible trade instruments. Large firms move slowly; SMEs pivot quickly. Yet despite this natural advantage, only about five percent of Indian SMEs participate directly in exports. This is a strategic underutilisation. The Growth Agenda 2026 must treat SME exports not as a niche programme but as a national priority. This means simplifying export compliance for small firms, enabling plug-and-play access to global marketplaces, creating country-specific SME export corridors, and providing institutional handholding in standards compliance, intellectual property protection, and contract enforcement. Vietnam and South Korea did not build export power solely through large conglomerates; they cultivated export-native SMEs. India must internalise that lesson.
The conversation around SMEs is often framed around low-cost labour. This framing is outdated and increasingly dangerous. Low-cost labour without skills leads to low-value output and traps firms in permanent margin compression. The real bottleneck lies in middle-skill leadership shop-floor supervisors, quality controllers, supply-chain planners, digital integrators, and production managers. By 2026, India needs a National SME Skills Stack aligned with sector-specific needs, industry-certified outcomes, and continuous upskilling rather than one-off training programmes. This is not a corporate social responsibility exercise. It is a core economic necessity. SMEs grow only when the people inside them grow in capability and confidence.
There is also an uncomfortable but unavoidable truth that must be confronted. Many SMEs remain family-bound, opaque, and governance-light. This limits their ability to attract capital, professional talent, and strategic partnerships. The next phase of SME growth therefore requires voluntary governance upgrading, encouraged rather than imposed. Better governance must be incentivised through preferential access to credit, faster approvals, export facilitation, and advantages in public procurement. Governance cannot be reduced to moral exhortation. It must become a source of competitive advantage.
Ultimately, India does not need more SMEs. It needs stronger SMEs. The Indian SME Growth Agenda 2026 must pivot decisively from counting enterprises to increasing net value added, from compliance obsession to capability building, from credit volume to credit quality, and from survival to scalability. The timing could not be more critical. Regulatory intent, digital infrastructure, demographic energy, and global opportunity are converging in rare alignment. History will not judge India by how many enterprises it registered, but by how many it enabled to grow up, scale out, and compete globally. If India gets SME growth right, the five-trillion-dollar economy will not be an aspiration; it will be a byproduct. If it does not, no amount of headline GDP will compensate for the opportunity lost at the base of the economic pyramid.
The SME story is not a footnote in India's growth narrative. It is the chapter where economic ambition meets institutional courage.
[Major General Dr. Dilawar Singh, IAV, is a distinguished strategist having held senior positions in technology, defence, and corporate governance. He serves on global boards and advises on leadership, emerging technologies, and strategic affairs, with a focus on aligning India's interests in the evolving global technological order.]
