No More Interest Subsidy: Budget 2026 Redefines Export Support for MSMEs

India’s export policy is undergoing a significant shift, marking a departure from interest subsidy led support towards a framework focused on trade facilitation, export insurance and infrastructure-led competitiveness. The Union Budget 2026–27 has made this transition clear by phasing out interest equalisation benefits and reallocating resources to strengthen long-term export capabilities.

For years, interest subsidies played a critical role in helping exporters, especially micro, small and medium enterprises (MSMEs), manage high borrowing costs. However, the government has now formally withdrawn the Interest Equalisation Scheme (IES), with no fresh allocation in the current budget. This move signals a conscious policy decision to move away from short-term cost relief towards structural support aimed at making Indian exports more resilient and globally competitive.

The budget documents indicate that export support will now increasingly come through mechanisms such as export credit insurance, trade facilitation measures, logistics improvements and manufacturing-linked infrastructure. The emphasis is on enabling exporters to manage risk, improve efficiency and integrate more effectively into global value chains rather than relying on recurring interest subventions.

This shift has important implications for MSMEs, which form the backbone of India’s export ecosystem and contribute nearly half of the country’s total exports. Labour-intensive sectors such as textiles, garments, leather, handicrafts and engineering goods have historically depended on interest support to remain competitive, particularly during periods of weak global demand and tight domestic liquidity.

Vinod Kumar, President, India SME Forum, cautioned that while the new direction aligns with long-term capacity building, the withdrawal of interest support could increase immediate financial stress for MSMEs. “The removal of the Interest Equalisation Scheme significantly raises the cost of export credit for MSMEs at a time when global demand remains uncertain, interest rates are high and liquidity pressures are acute,” he said. “For many small exporters, access to affordable working capital continues to be a critical challenge.”

At the same time, the government has outlined steps to strengthen export-related infrastructure and institutional support. These include reforms to special economic zones (SEZs), facilitation of duty-free imports for export production and improved integration between domestic tariff areas and export hubs. Sales from SEZ units to the domestic market will continue to be treated as imports, maintaining policy consistency while encouraging SEZs to remain export-focused.

The budget also highlights a push towards reducing transaction costs and improving trade facilitation, including customs digitisation, logistics efficiency and faster clearances. These measures are intended to lower structural disadvantages faced by Indian exporters and improve delivery timelines, an area where MSMEs often struggle due to limited scale and bargaining power.

However, the transition is not without risks. Industry stakeholders note that while insurance-based and infrastructure-led support is important, such measures typically deliver benefits over the medium to long term. In the short run, MSMEs may face higher financing costs, especially those operating on thin margins or dependent on export credit for working capital.

The government’s approach suggests confidence that improved competitiveness, lower logistics costs and better market access will compensate for the withdrawal of interest subsidies over time. For MSMEs, this means adapting to a new policy environment where financial discipline, compliance, quality standards and operational efficiency will play an even greater role in sustaining export growth.

As global trade conditions remain volatile, MSMEs will need clarity on how quickly alternative support mechanisms can translate into tangible relief. Ensuring smooth access to export credit insurance, faster refunds, predictable policies and targeted handholding will be critical to prevent smaller exporters from being squeezed out during this transition.

The export policy reset reflects a broader shift in India’s economic strategy from supporting exports through cost compensation to building competitiveness through capability. For MSMEs, the road ahead will require adjustment, preparedness and stronger institutional support to ensure that long-term reforms do not come at the cost of short-term survival.