India Wants Its SMEs to Grow. Infrastructure Execution Is the Binding Constraint

India’s policy intent toward SMEs is unequivocal. Over the past five years, successive Union Budgets, industrial strategies and regulatory reforms have signalled a clear commitment to formalising, scaling and globalising the country’s SME base. Schemes such as the Emergency Credit Line Guarantee Scheme (ECLGS) have supported over ₹3.5 lakh crore in guarantees across nearly 90 lakh MSME accounts, while Production Linked Incentives (PLI) now span 14 sectors. Infrastructure-focused initiatives such as PM Gati Shakti and the National Logistics Policy are intended to reduce systemic friction across supply chains.

Yet for a significant segment of manufacturing, logistics-linked and export-oriented SMEs, competitiveness is increasingly determined not by incentives but by infrastructure execution the reliability of roads, ports, power, and digital systems in daily operations. Policy intent is clear; operability is not.

Infrastructure as an Unpriced Cost of Doing Business

Infrastructure inefficiencies function as a hidden tax on SMEs, directly eroding competitiveness. According to the World Bank’s Logistics Performance Index (LPI) 2023, India ranks 38th out of 139 countries, an improvement but still behind peers such as Vietnam (39th) and Thailand (32nd). Disaggregated sub-indices reveal persistent operational constraints: India scores 2.95 on timeliness and 3.12 on infrastructure quality (scale 1-5), reflecting last-mile unpredictability that disproportionately affects smaller firms.

The Ministry of Commerce and Industry estimates that logistics costs remain high at 13-14% of GDP, compared with 8-10% in advanced economies such as the US (8-9%) and Germany (8.7%). For SMEs, which typically operate on margins of 6-10%, even modest infrastructure inefficiencies translate into sharply eroded profitability through higher inventory, unplanned warehousing, and extended receivable cycles.

Power infrastructure presents a similar challenge. While India’s total installed capacity exceeded 430-440 GW by 2024-25, voltage fluctuations and regional outages remain frequent in Tier-2 and Tier-3 industrial clusters. Manufacturing SMEs often rely on diesel generators or voltage stabilisers, adding 10-20% to unit costs, highlighting that infrastructure inefficiency is structural, not episodic.

Deteriorating Road Infrastructure: A Last-Mile Risk

India has expanded its national highways to over 1.1 million km, yet state and district road quality remains uneven. The Ministry of Road Transport and Highways’ Annual Report 2023-24 indicates that nearly 25% of state and district roads are rated “fair to poor,” impacting industrial access.

Industry surveys by FICCI and CII report that inadequate last-mile connectivity can add 10-15% to logistics costs for SMEs outside major corridors. Exporters in Tier-3 and Tier-4 clusters are particularly exposed: poor connectivity to Inland Container Depots (ICDs) and ports can add days of transit time, elevate demurrage charges and undermine buyer confidence in competitive global markets.

Vehicle maintenance, extended transit, fuel, and insurance costs rise proportionally. According to logistics surveys, SMEs may face 20-30% higher vehicle maintenance costs and 10-18% longer transit times, highlighting the hidden operational tax embedded in road infrastructure gaps.

Manufacturing SMEs: Capacity Without Reliability

Manufacturing SMEs account for 30-45% of industrial output and over 35% of sector employment, supplying critical sectors such as auto components, engineering goods, textiles, and pharmaceuticals. Yet regional infrastructure gaps limit their operational reliability.

Despite growth in credit for manufacturing MSMEs (14.2% in FY24-25, RBI data), elevated non-performing asset ratios reflect disruptions arising from infrastructure failures. Voltage fluctuations, water shortages and uneven logistics reliability mean that SMEs must invest in costly redundancy systems, adding 10–20% to production costs.

Under PLI schemes, where anchor firms emphasise delivery consistency and quality, SMEs unable to meet infrastructure-backed reliability benchmarks face exclusion from growth opportunities despite technical capacity.

Logistics SMEs: Corridors Improve, Downstream Friction Persists

The PM Gati Shakti framework has prioritised multimodal corridors with coordinated projects worth over ₹100 lakh crore, including the Dedicated Freight Corridors (DFC), which have moved over 400 million tonnes of freight since partial commissioning.

However, localised friction persists. Logistics Efficiency Enhancement Program (LEEP) data shows that 30-35% of logistics delays occur beyond national corridors, particularly at state borders, urban entry points, and industrial cluster peripheries. FICCI-KPMG surveys estimate that micro-frictions cost logistics SMEs 2-4% of annual revenue, equivalent to a full quarter of net margins for small operators.

For SMEs managing cold chains, warehousing and fleet operations, these downstream frictions directly erode competitiveness and margin resilience.

Export-Oriented SMEs: Where Compliance Meets Infrastructure Gaps

SMEs contribute roughly 45% of India’s merchandise exports (Ministry of Commerce, FY23–24). Export-oriented SMEs face a dual burden: fragmented physical and digital infrastructure. Multiple compliance systems (GST, ICEGATE, DGFT, port community systems) create procedural complexity. FISME 2023 surveys report that over 55% of SMEs cite compliance complexity as a key barrier to exports, compounding the operational impact of logistics delays.

Procedural inefficiencies and physical delays together create working capital lock-in, disproportionately affecting SMEs without dedicated trade operations teams. Even minor delays can compromise contractual obligations and buyer confidence in highly competitive markets.

Why SMEs Bear the Disproportionate Burden

MSMEs contribute nearly 30% of India’s GDP and 45% of exports, yet they operate closer to cash-flow thresholds than large corporates. RBI data shows that credit spreads for SMEs remain 200-basis points higher, reflecting systemic risk. Infrastructure and compliance inefficiencies magnify this exposure, effectively filtering which SMEs can operate competitively. Banks, NBFCs, anchor buyers, and digital marketplaces increasingly use infrastructure-backed reliability indicators delivery predictability, GST compliance, digital traceability as thresholds for participation in supply chains.

A Constructive Agenda

To turn India’s SME growth intent into reality, infrastructure policy must shift from asset creation to measurable outcomes. Reliability metrics should track downtime and failures, while SME impact audits assess usability for firms with 10-50 employees. Last-mile connectivity urban access roads, feeders, cluster links must match corridor priorities. Digital and physical systems should integrate to reduce compliance friction, and enforcement must be paired with enablement to lower operational burdens. Manufacturing, logistics, and export SMEs need infrastructure that reduces uncertainty, strengthens supply chains, and improves working capital. 

Ease of doing business is not a declaration; it is an experiential outcome.