Union Budget 2026-27: A Transformative Push for MSMEs Through Financial Reforms

By Eram Shaikh --
Monday, 02 Feb, 2026

The Union Budget 2026-27, presented by Finance Minister Nirmala Sitharaman on February 1, 2026, recognises Micro, Small, and Medium Enterprises (MSMEs) as a vital pillar of India's economy. This sector contributes nearly 30% to the nation's GDP, over 45% to exports, and employs more than 11 crore people. Despite its scale, MSMEs grapple with chronic issues: persistent liquidity shortages from delayed payments, limited access to equity capital, high dependence on costly debt, and barriers to formal credit. The budget addresses these challenges head-on with a structured, multi-pronged financial reform strategy designed to foster growth, resilience, and global competitiveness. By emphasising equity infusion, liquidity enhancement, and credit expansion, the government aims to elevate MSMEs from survival-oriented units to "Champion" enterprises capable of driving employment, innovation, and exports in alignment with the Viksit Bharat vision.

At the core of the reforms is the launch of a dedicated ₹10,000 crore SME Growth Fund. This initiative provides equity support to high-potential MSMEs selected on criteria such as performance, scalability, innovation, and export readiness. Unlike traditional debt financing, which burdens balance sheets with interest obligations and repayment pressures, equity capital reduces leverage risks, improves financial health, and frees resources for critical investments. MSMEs can now channel funds toward technology adoption, process modernization, product diversification, capacity building, and market penetration—both domestic and international. This shift is particularly significant in a volatile global environment marked by supply-chain disruptions and tariff uncertainties, enabling enterprises to build long-term competitiveness and transition toward export-led growth.

Complementing this is a ₹2,000 crore top-up to the Self-Reliant India Fund, originally established in 2020 with a ₹50,000 crore corpus. The additional allocation targets micro-enterprises with strong growth prospects, offering risk capital and equity-like support. This measure bridges a critical gap for smaller players often overlooked by conventional lenders, allowing them to scale operations without excessive debt accumulation.

Liquidity constraints, exacerbated by delayed payments that trap billions in working capital, receive targeted attention through major enhancements to the Trade Receivables Discounting System (TReDS). The platform, which has already unlocked over ₹7 lakh crore in financing for MSMEs, benefits from four key reforms: mandating TReDS as the default settlement platform for all purchases from MSMEs by Central Public Sector Enterprises (CPSEs), setting a precedent for private buyers; introducing credit guarantee coverage via the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for invoice discounting on TReDS; integrating TReDS with the Government e-Marketplace (GeM) to facilitate seamless data sharing for faster, cheaper financing; and recognizing TReDS receivables as asset-backed securities to foster a secondary market, thereby deepening liquidity and improving transaction efficiency.

The budget further strengthens the CGTMSE scheme by raising guarantee ceilings, extending coverage to TReDS transactions, and offering higher guarantees with lower fees for priority segments like startups. These changes promote data-driven, collateral-light lending, leveraging GST returns, transaction histories, and supply-chain data to expand formal credit access and lower borrowing costs.

The probable positive impacts of these reforms are substantial and interconnected. Enhanced TReDS adoption and secondary market development will accelerate cash flows, drastically reduce working capital gaps, and empower MSMEs with better bargaining power against delayed payers. Equity from the SME Growth Fund and Self-Reliant India Fund top-up will lower the overall cost of capital, strengthen balance sheets, and improve creditworthiness. Combined with expanded CGTMSE support and inclusive underwriting, these measures are poised to unlock significantly higher formal credit volumes, potentially adding tens of thousands of crores in lending capacity. MSMEs will gain the financial headroom to invest in upgradation, quality enhancement, compliance for exports, and innovation, fostering greater resilience against economic shocks, raw material volatility, and demand fluctuations. Ultimately, these reforms promise to boost productivity, employment generation, export contribution, and integration into global value chains, positioning the sector as a true engine of inclusive and sustainable growth.

Union Budget 2026-27: A Transformative Push for MSMEs Through Financial Reforms. The Union Budget 2026-27, presented by Finance Minister Nirmala Sitharaman on February 1, 2026, recognises Micro, Small, and Medium Enterprises (MSMEs) as a vital pillar of India's economy. This sector contributes nearly 30% to the nation's GDP, over 45% to exports, and employs more than 11 crore people. Despite its scale, MSMEs grapple with chronic issues: persistent liquidity shortages from delayed payments, limited access to equity capital, high dependence on costly debt, and barriers to formal credit. The budget addresses these challenges head-on with a structured, multi-pronged financial reform strategy designed to foster growth, resilience, and global competitiveness. By emphasising equity infusion, liquidity enhancement, and credit expansion, the government aims to elevate MSMEs from survival-oriented units to "Champion" enterprises capable of driving employment, innovation, and exports in alignment with the Viksit Bharat vision.

At the core of the reforms is the launch of a dedicated ₹10,000 crore SME Growth Fund. This initiative provides equity support to high-potential MSMEs selected on criteria such as performance, scalability, innovation, and export readiness. Unlike traditional debt financing, which burdens balance sheets with interest obligations and repayment pressures, equity capital reduces leverage risks, improves financial health, and frees resources for critical investments. MSMEs can now channel funds toward technology adoption, process modernization, product diversification, capacity building, and market penetration—both domestic and international. This shift is particularly significant in a volatile global environment marked by supply-chain disruptions and tariff uncertainties, enabling enterprises to build long-term competitiveness and transition toward export-led growth.

Complementing this is a ₹2,000 crore top-up to the Self-Reliant India Fund, originally established in 2020 with a ₹50,000 crore corpus. The additional allocation targets micro-enterprises with strong growth prospects, offering risk capital and equity-like support. This measure bridges a critical gap for smaller players often overlooked by conventional lenders, allowing them to scale operations without excessive debt accumulation.

Liquidity constraints, exacerbated by delayed payments that trap billions in working capital, receive targeted attention through major enhancements to the Trade Receivables Discounting System (TReDS). The platform, which has already unlocked over ₹7 lakh crore in financing for MSMEs, benefits from four key reforms: mandating TReDS as the default settlement platform for all purchases from MSMEs by Central Public Sector Enterprises (CPSEs), setting a precedent for private buyers; introducing credit guarantee coverage via the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for invoice discounting on TReDS; integrating TReDS with the Government e-Marketplace (GeM) to facilitate seamless data sharing for faster, cheaper financing; and recognizing TReDS receivables as asset-backed securities to foster a secondary market, thereby deepening liquidity and improving transaction efficiency.

The budget further strengthens the CGTMSE scheme by raising guarantee ceilings, extending coverage to TReDS transactions, and offering higher guarantees with lower fees for priority segments like startups. These changes promote data-driven, collateral-light lending, leveraging GST returns, transaction histories, and supply-chain data to expand formal credit access and lower borrowing costs.

The probable positive impacts of these reforms are substantial and interconnected. Enhanced TReDS adoption and secondary market development will accelerate cash flows, drastically reduce working capital gaps, and empower MSMEs with better bargaining power against delayed payers. Equity from the SME Growth Fund and Self-Reliant India Fund top-up will lower the overall cost of capital, strengthen balance sheets, and improve creditworthiness. Combined with expanded CGTMSE support and inclusive underwriting, these measures are poised to unlock significantly higher formal credit volumes, potentially adding tens of thousands of crores in lending capacity. MSMEs will gain the financial headroom to invest in upgradation, quality enhancement, compliance for exports, and innovation, fostering greater resilience against economic shocks, raw material volatility, and demand fluctuations. Ultimately, these reforms promise to boost productivity, employment generation, export contribution, and integration into global value chains, positioning the sector as a true engine of inclusive and sustainable growth.