Cautious Optimism Defines India’s MSME Sentiment in Q2 FY26: SIDBI MSME Outlook Survey

Even as global trade tremors and tariff headwinds test India’s business climate, the country’s micro, small and medium enterprises (MSMEs) continue to demonstrate remarkable resilience. The Small Industries Development Bank of India (SIDBI), in its latest MSME Outlook Survey (Round 4, Q2 FY26), has reported that while optimism among MSMEs moderated marginally, business confidence remains well above expansion levels signalling a sector that is adaptive, forward-looking and policy aware.

The MSME Business Confidence Index (M-BCI) dipped to 61.64 in the July–September 2025 quarter from 63.75 in Q1, largely reflecting the impact of U.S. tariff measures and external trade pressures. Yet, the Business Expectations Index (M-BEI) rose to 62.26 for the next quarter and is projected to climb further to 66.57 a year ahead underscoring an optimistic outlook anchored in domestic demand strength, festive consumption and GST rationalisation.

Resilience Amid Global Disruptions

According to SIDBI, the moderation in sentiment can be traced to global headwinds notably the U.S. tariff impositions impacting Indian exports. Yet, domestic demand, festive consumption and recent GST rate reductions have cushioned MSMEs from deeper contraction. The MSME Business Expectations Index (M-BEI) paints a more upbeat picture projected to rise to 62.26 next quarter and 66.57 a year ahead, suggesting that small enterprises anticipate stronger market conditions and policy tailwinds in FY26–27.

Sales and Export Sentiment

The survey shows a mild dip in current quarter sales optimism, with 47% of manufacturing and 50% of trading MSMEs reporting growth compared to higher numbers in Q1. However, optimism for the festive season and next year remains strong 54% expect growth in Q3, while 62% foresee expansion in FY27.

Exporting MSMEs, though hit by tariff barriers, have displayed notable resilience: 56% expect healthy export growth next year, with 41% reporting limited or no adverse impact from U.S. tariffs. This points to diversification efforts and market agility among outward-focused MSMEs.

Margins Stable, Costs Easing, Credit Still Tight

Low wholesale inflation has helped ease input cost pressures, particularly in manufacturing and trading, while the services sector reported stable input expenses. Profit margins have held steady nearly 80% of respondents report stability or improvement.

Access to finance, however, continues to divide sentiment. While 92% of manufacturing MSMEs said credit was available, many found it inadequate. In services, 19% reported difficulty accessing finance. Though interest burdens eased due to RBI rate adjustments, respondents remain cautious about future credit costs amid tightening spreads by lenders.

Recovery Gains, But Structural Gaps Remain

Encouragingly, availability of skilled labour has improved since previous rounds, though optimism remains constrained by structural gaps. Capacity utilisation continues to rise steadily, 25% of manufacturing units now operate above normal levels (up from 21%), with projections touching 36% by FY27. This expansion intent is visible, with 42% of manufacturers and 35% of service enterprises planning new capacity additions next year.

Ease of Doing Business and Policy Signals

Ease of Doing Business (EoDB) indicators show progressive improvement. Over 60% of MSMEs across sectors expect betterment in regulatory ease, electricity supply and compliance timelines over the next year. However, a large neutral cohort (~40%) still sees limited incremental change, signalling the need for deeper procedural reforms and digitised facilitation for small enterprises.

Quality Control Orders

The introduction of Quality Control Orders (QCOs) under the Atmanirbhar Bharat initiative has had uneven impacts. About 31% of manufacturing and 37% of trading MSMEs reported being affected mainly through cost and compliance pressures while 16–19% were unaware of QCO requirements altogether. The data highlights the urgency for capacity-building and awareness programmes to prevent smaller firms from being edged out of quality-led markets.

The Maturity of Cautious Confidence

The SIDBI survey underscores a maturing MSME ecosystem one that is learning to price uncertainty into its business calculus. While optimism is intact, it is disciplined, data-backed and policy-aware, marking a shift from reactive resilience to strategic anticipation.

For policymakers, the message is twofold: first, that credit depth and skilled labour supply remain structural bottlenecks; and second, that regulatory clarity and procedural predictability are as vital to MSME sentiment as fiscal incentives.

For MSMEs, the survey is both reassurance and reminder that adaptability, digitisation, and financial discipline are no longer optional in a world where regulatory risk, global trade dynamics and domestic consumption cycles increasingly intersect.

India’s small business economy may be moving cautiously, but it’s moving forward and that’s the most telling indicator of all.