MSMEs at the Heart of Indo-Japan Ties: Powering a New Chapter of Inclusive Growth

In both India and Japan, small and medium enterprises aren’t just economic contributors, they are the backbone of industry and employment. In Japan, SMEs account for over 99% of firms and employ nearly 70% of the workforce. In India, the 5.7 crore MSMEs contribute around 30% of GDP and 46% of exports, playing an instrumental role in innovation, domestic production and employment generation.

2025: A Turning Point for MSME-Centric Diplomacy

The 15th India-Japan Annual Summit held in Tokyo in August 2025 marked the most ambitious phase in the bilateral relationship so far. The two leaders, Prime Minister Narendra Modi and Prime Minister Shigeru Ishiba, signed thirteen agreements covering critical sectors, while committing to a bold target of ¥10 trillion (approximately ₹6 trillion) in Japanese private-sector investment in India over the next decade. This level of commitment underlines the fact that MSMEs are not merely peripheral to the partnership, they are its centrepiece.

The joint statement of the summit explicitly highlighted SME and startup collaboration as core priorities in the renewed Special Strategic and Global Partnership. Prime Minister Modi’s “Make in India, Make for the World” vision extended a direct invitation to Japanese MSMEs to become a part of India’s growth narrative, creating a win-win for both economies.

Programs and Investments for MSMEs

The summit’s announcements were not limited to rhetoric; they translated into actionable initiatives. The newly established India-Japan SME Forum is designed to facilitate structured dialogue between entrepreneurs, regulators, and financiers, ensuring that MSMEs gain direct access to policy and funding windows. A parallel initiative, the Private-Sector Economic Security Dialogue co-chaired by Keidanren and CII, has expanded its agenda to include MSME-focused sectors such as semiconductors, logistics, and critical minerals.

Additionally, Digital Partnership 2.0 and the Japan-India Startup Support Initiative (JISSI) are rolling out programs that provide mentorship, funding and digital tools for MSMEs transitioning toward technology-driven business models. Human capital exchange is another significant feature, with a new skill mobility initiative aiming to place 50,000 Indian professionals in Japan over the next five years, further deepening the talent and cultural linkages between the two nations.

Technology Transfer and the Kaizen Advantage

Perhaps the most transformative element of the Indo-Japan MSME collaboration is the emphasis on technology transfer and process excellence. Japan’s globally recognized Kaizen and 5S methodologies are now being integrated into India’s MSME framework through structured training programs. In February 2025, trainers were certified in these practices at a Delhi event co-hosted by the MSME Ministry and AOTS (Association for Overseas Technical Cooperation and Sustainable Partnerships). This initiative ensures that Indian MSMEs move beyond cost competitiveness to match the highest global quality standards.

Pilot programs in manufacturing hubs like Ludhiana are already blending Japanese precision practices with India’s local capabilities. The integration of Kaizen is not merely theoretical; it is shaping real-world improvements in productivity, waste reduction and operational efficiency, preparing Indian MSMEs for export-driven growth.

Strategic Sectors of Collaboration

Semiconductors and electronics remain at the forefront of this partnership. Japanese firms like Renesas and Tokyo Electron have entered collaborations with Indian companies to build advanced packaging and testing facilities, inviting MSMEs into the value chain for chip design, tooling and precision engineering. Green energy is another strategic pillar, where Indo-Japan agreements on green hydrogen and green ammonia are opening avenues for MSMEs to participate in renewable energy ecosystems. Financing support such as REC’s ₹7,000 crore green loan underlines the seriousness of this commitment.

Advanced manufacturing and mobility continue to be areas of deep cooperation. Beyond the bullet train project, which has MSMEs embedded in its supply and maintenance chain, joint ventures like Escorts-Kubota are redefining how cross-border partnerships can scale across agritech and machinery segments. Similarly, the rapid adoption of robotics, AI and digital tools under the Digital Partnership framework is helping small enterprises modernize at an unprecedented pace.

Institutional Support and Financial Ecosystem

Institutional backing remains a cornerstone of this evolving partnership. Organizations like JETRO have been instrumental in mentoring Japanese SMEs entering India, while Indian bodies such as CII and FICCI are aligning with Keidanren to launch SME facilitation programs that address certification, compliance, and financing bottlenecks. On the financing front, JBIC and JICA are extending concessional loans for industrial corridor development, ensuring that MSME clusters benefit from modern infrastructure and logistics networks.

India’s own policy ecosystem complements these efforts. The Credit Guarantee Fund Trust (CGTMSE), which crossed ₹5.2 lakh crore in loan guarantees by 2024, has embraced AI-driven credit assessments in 2025, speeding up approvals for small businesses. State governments, too, are leveraging this moment. For example, Chhattisgarh has proactively invited Japanese firms to invest in electronics and food processing, ensuring that the MSME advantage goes beyond metropolitan hubs to regional clusters.

Opportunities and Barriers

The potential for MSME-led growth under this partnership is enormous. Global supply chains are recalibrating away from China, and Indo-Japanese MSME networks are well-positioned to deliver high-quality, cost-efficient solutions for global markets. These collaborations also have a third-market dimension, enabling MSMEs to co-create products for Africa, Southeast Asia and Latin America using combined strengths of Japanese technology and Indian scalability.

However, challenges persist. Indian MSMEs often struggle to meet Japan’s rigorous quality and compliance standards, while Japanese SMEs find India’s regulatory environment complex. Language barriers, IP protection concerns, and slow certification processes can hinder partnerships. Both governments and industry bodies are aware of these friction points and are working toward solutions such as expedited approvals, shared IP frameworks and co-funding mechanisms to ease market entry.

MSMEs as Strategic Anchors of Indo-Japan Relations

The narrative has fundamentally shifted. MSMEs are no longer passive participants; they are strategic anchors in the Indo-Japan growth story. With strong policy frameworks, targeted investments, robust training programs and institutional collaboration, the partnership is creating an enabling ecosystem where small businesses can thrive.

The ¥10 trillion vision is ambitious, but its success will be defined not merely by capital inflows, but by how many MSMEs transform into globally competitive enterprises. If executed well, this collaboration could set a benchmark for inclusive, innovation-led development one where the resilience and dynamism of MSMEs rewrite the Indo-Japan economic script for the next decade.