The US Tariff Shock: Which Indian MSME Sectors Will Bear the Brunt?

The recent imposition of a 26% tariff by the United States on select Indian exports has sent ripples through India’s Micro, Small, and Medium Enterprises (MSMEs), which form the backbone of the country’s export economy. Contributing nearly 45% of India’s total exports, these enterprises are now grappling with a sudden surge in trade barriers. While the tariffs aim to bolster US domestic manufacturing, their impact on Indian MSMEs—particularly in key sectors like electronics, gems and jewellery, and textiles—could reshape trade dynamics and threaten livelihoods. Here’s a closer look at the industries most at risk.

Electronics: The Nerve Center Under Stress

India’s electronics sector, which exports $14 billion worth of goods to the US annually, is dominated by MSMEs producing components like printed circuit boards (PCBs) and consumer electronics. These smaller manufacturers operate on tight margins, leaving little room to absorb the 26% tariff. Analysts predict a 12% drop in exports, translating to a $1.78 billion loss. For MSMEs, this could mean reduced orders, layoffs, or even closures as buyers pivot to cheaper alternatives in Southeast Asia.

Gems and Jewellery: A Glittering Sector Losing Its Shine

The gems and jewellery industry, which ships $9 billion worth of products to the US annually, is a lifeline for thousands of small-scale artisans and exporters. Precious stones and gold jewellery, already price-sensitive, will become less competitive with the tariff hike. Small exporters, who rely on thin profit margins, face an existential threat as US buyers seek lower-cost options from countries like Thailand or Turkey.

Textiles and Readymade Garments: Stitching Together a Crisis

India’s $6 billion textile and garment export sector to the US is synonymous with MSMEs. From spinning units to garment clusters, small businesses form the backbone of this industry. The 26% tariff erodes their cost advantage over competitors like Bangladesh and Vietnam, which benefit from preferential trade agreements. With orders already shrinking, many MSMEs risk losing their foothold in the US market entirely.

Machinery: Precision Manufacturing at a Crossroads

MSMEs producing machinery and mechanical appliances, including components for nuclear reactors, account for a significant share of India’s $7.1 billion machinery exports to the US. The tariff disrupts supply chains for precision manufacturers facing higher costs and potential order cancellations. Smaller firms, lacking the scale to negotiate better terms, are particularly vulnerable.

Auto Components: A Smaller but Vulnerable Player

While auto parts account for a smaller portion of India’s US exports ($2 billion annually), MSMEs in this sector face a double blow. Earlier 25% tariffs on components like steel and aluminium, combined with the new 26% levy, could force smaller players out of the market. Those supplying niche products like engine parts or electrical systems may struggle to survive.

The US is India’s largest export partner, absorbing $74 billion worth of goods annually—17% of India’s total exports. MSMEs in the affected sectors employ millions of workers and sustain countless ancillary industries. A sharp decline in exports could trigger job losses, reduced manufacturing activity, and slower economic growth. Moreover, India’s competitive edge in labour-intensive sectors risks erosion as global buyers shift to tariff-free alternatives.

While the tariffs pose immediate challenges, they also underscore the need for Indian MSMEs to diversify markets, adopt automation, and focus on high-value products. The crisis could catalyse innovation, but the hardest-hit sectors may face irreversible damage without swift adaptation. For now, the 26% tariff stands as a litmus test for the resilience of India’s MSME ecosystem—a test it cannot afford to fail.