Union Budget 2025: A Snapshot of MSME Reforms and Improved Access to Working Capital Financing 

-By Mr. Ketan Mehta, CFO, CredAble 

The Union Budget 2025-26 takes a bold approach towards improving India’s industrial output and export competitiveness. 

It is impressive to see the government take a renewed focus on the Micro, Small, and Medium Enterprises (MSMEs) sector and create a dedicated framework of policies and measures to protect and bolster their growth. 

Budget overview: What it means for MSMEs 

While there are lot of discussions around raising the tax exemption limit to INR 12 lakh, the budget is a landmark moment for MSMEs too. It has ushered in transformative reforms and a structured approach to address long-standing gaps in working capital financing for small and growing businesses—particularly in manufacturing and exports. 

Let’s take a closer look at the policy changes and what they mean for MSMEs. 

More MSMEs qualify for credit 

To foster inclusive growth, the government has increased the investment and turnover limits for MSMEs by 2.5 and 2 times, respectively. The broadening of MSME classification is a step in the right direction for improving credit access; however, the real challenge lies in ensuring businesses (especially MSMEs operating in tier 2 and 3 cities) can access working capital financing with minimal delays. The government must now focus on creating more flexible, tech-driven credit models that evaluate business growth potential rather than pushing for traditional financing requirements. Simplifying application processes and enhancing digital solutions for faster loan approvals will ensure this reform is better suited for MSMEs. 

New credit cover will address the collateral-based lending gaps 

Doubling the credit guarantee cover for MSMEs is a welcome correction, and it strengthens the foundation for enterprises seeking working capital without the burden of collateral-heavy lending. 

The government has expanded the MSME definition, raising the turnover limits to INR 10 crore for micro enterprises. The turnover limits for small enterprises have gone up to INR 100 crore and for medium enterprises up to INR 500. 

For far too long, many mid-sized companies have been operating in the ‘missing middle.’ Medium enterprises are too large for microfinance business schemes and too small for large-scale corporate lending. Moreover, traditional lending models don’t always account for high-potential businesses with non-traditional assets. As such, this structural reform needs to be backed by improved credit assessment frameworks that prioritise growth potential over traditional collateral-based lending needs. 

An increase in the ME-Card limit is necessary 

The ME-Card promises faster access to working capital—but it may not completely solve the liquidity issues faced by micro enterprises. While INR 5 lakh is a reasonable starting credit limit, many businesses in this category require larger capital reserves to fund their growth. A revision of the ME-Cards’ limits and repayment terms—tailored to specific capital-intensive industries like automotive manufacturing, mining, and steel production—would make it more impactful for businesses looking to scale. 

In a move to ease financial pressure on startups, the government has extended the 100% tax deductions on profits for another five years, including eligible businesses incorporated before April 1, 2030.  

Additionally, the scope of the Fund of Funds for startups has been expanded with a contribution of another INR 10,000 crore. This measure bridges the gap between startup capital requirements and available funding pools, ensuring steady working capital access in the early stages of growth. 

New initiatives strengthen export MSMEs’ access to trade finance 

In the export sector, access to timely and flexible trade financing solutions has often been a roadblock. MSMEs contribute 45% to India’s exports, and the budget for 2025 reflects a strong commitment to fortifying this sector. 

The DPI-powered BharatTradeNet (BTN) initiative is a pivotal step toward digital-first trade documentation and financing. This initiative, combined with the Export Promotion Mission and backed by targeted loans of up to INR 20 crore for well-run exporter MSMEs, is a strong start to secure India’s growing prominence in global trade corridors. While these initiatives provide much-needed credit, it’s important to ensure that the funds are accessible and flexible to the export cycle. Exporters often face long payment delays; as a result, the focus should be to offer credit products that align with their unique cash flow patterns. Flexible financing terms and faster disbursement processes will help strengthen India’s exports in global markets. 

Dedicated financing for first-time entrepreneurs 

The budget has introduced a new scheme where term loans of up to INR 2 crore will be rolled out for five lakh women, Scheduled Castes, and Scheduled Tribes who are first-time entrepreneurs. This initiative seeks to promote inclusivity and support underrepresented groups in the business community. 

The budget has also introduced sector-specific schemes covering handicrafts, leather, and marine products. This will be a massive boost to industrial activities across the nation, further amplifying India’s global competitiveness. 

The push for ‘Make-in-India’ to accelerate domestic manufacturing 

The working capital cycles in manufacturing are long, while cash flow gaps can slow down production. The National Manufacturing Mission has been introduced to provide policy support and execution roadmaps to boost domestic manufacturing and generate more jobs. A dedicated focus on clean tech manufacturing is closely aligned with the county’s ongoing race to meet climate goals. Key investments will target solar PV cells, EV batteries, wind turbines, and other clean technologies. In addition to this, introducing more flexible financing, such as invoice-based credit and supplier financing, is needed to speed up production to meet growing demands and cement India’s stand as a manufacturing hub in global markets. 

Building a structured financial ecosystem for MSMEs 

The budget signals a step towards a financial ecosystem where MSMEs can access structured funding at different stages of growth. The policies introduced in this budget will allow more enterprises to qualify for financial assistance, lowering the barriers to accessing working capital financing. These reforms also lay the groundwork for a more resilient and self-sustaining business environment. 

Along with raising credit limits, we also need better risk assessment models in place, faster approvals, and incentives that reward long-term value creation. Targeted funding to MSMEs should prioritise sectors that create jobs and strengthen India’s position in local and global supply chains.