India's Cash-strapped MSMEs Struggling To Compete With Cheap Chinese Goods

In a concerning development, Global Trade Research Initiative (GTRI), a think tank and consulting firm has said that imports from China are hurting India's cash-strapped micro, small and medium enterprises (MSMEs), as many of the imported products are also made by these local businesses.

The report added that the cheaper Chinese goods make it tough for MSMEs to compete, leading to struggles for survival. Shockingly, it revealed, “Some MSMEs have to shut down or reduce their operations, and they find it hard to grow due to the easy access to low-cost Chinese products."

These challenges affect job creation and economic growth in India. According to a McKinsey Global Institute (MGI) report, Indian MSMEs contribute 62 per cent to employment, as opposed to 77 per cent in other emerging economies. 

The GTRI report stated, “The heavy reliance on Chinese imports is eroding the market share and survival of Indian MSMEs. Strengthening domestic manufacturing is essential to protect these small businesses and maintain India's economic independence.”

China's Dominance Grows
In categories where China holds over 50 per cent of India’s global imports, Indian MSMEs are facing severe competition. For instance, China supplies 95.8 per cent of India’s umbrellas and sun umbrellas (USD 31 million) and 91.9 per cent of artificial flowers and human hair articles (USD 14 million). Additionally, glassware (USD 521.7 million, 59.7 per cent), leather articles including saddlery and handbags (USD 120.9 million, 54.3 per cent) and toys (USD 120.2 million, 52.5 per cent) are seeing a similar trend, severely impacting domestic manufacturers.

Even in ceramic products (USD 232.4 million, 51.4 per cent) and musical instruments (USD 15.7 million, 51.2 per cent), where Indian artisans once thrived, the dominance of Chinese imports is displacing local production. Experts noted that apart from constant issues such as delayed payments and debt on the domestic front, complex challenges in banking and trade regulations are hampering Indian MSMEs' participation in exports.

According to a report by India SME Forum, there are requirements for imports and exports to discourage engagement, alongside compliance and cost burdens, especially for smaller enterprises. “Tight restrictions on overseas payments, sectoral caps, FDls, delays in procurements, infrastructure costs, and stringent security regulations add further hurdles to the MSMEs in this domain,” it added.

Notably, India has set an ambitious export target of USD 2 trillion by 2030, presenting significant growth prospects for small businesses seeking expansion into international markets. The country boasts a robust community of more than 6.3 crore MSMEs, serving as the cornerstone of the economy by contributing approximately 28 per cent to the gross domestic product (GDP) and over 48 per cent to exports.

Despite the substantial MSME presence, only a nominal 35,000 actively engage in exports, revealing a considerable untapped potential. Nearly 64 per cent of Indian MSMEs operate with an annual turnover of less than one crore and less than one per cent currently export goods or services.

GTRI report revealed that in the mid-range of 30 to 50 per cent import share, Indian MSMEs are struggling to compete in industries such as furniture, bedding, and lamps (USD 370.8 million, 48.7 per cent), and tools, implements, and cutlery (USD 269.3 million, 39.4 per cent). 

These are sectors where Indian small businesses have traditionally been strong but are now losing ground due to the influx of Chinese goods. Similarly, products like articles of stone, plaster, and cement (USD 234.5 million, 49.3%), miscellaneous articles of base metal (USD 282.6 million, 47.0 per cent), and carpets (USD 24.8 million, 31.8 per cent) are under threat, diminishing the competitiveness of local producers.

Digital Competition Bill A Threat?
While speaking at a recent India SME Forum event, stakeholders from the MSME sector and startups have expressed concerns about the Modi government's Digital Competition Bill (DCB), its negative impact on MSME's competitiveness and global markets and its potentially detrimental effect on their ability to serve consumers. Notably, the bill intends to regulate and provide a level playing field however it is being used as a measure to solve commercial disputes between private parties. This can derail the vibrant MSME ecosystem in India.

“With large companies moving out of China, India is blessed with a great opportunity to gain from the exodus. Any regulation like DCB will act as a stumbling block in the country’s efforts to attract FDI, and promote global competitiveness of MSMEs,” said Vinod Kumar, President, India SME Forum (ISF).

Experts highlighted the essential role of supportive regulations in facilitating the growth of small businesses. They emphasised the necessity of policies and regulations that empower MSMEs, enabling them to digitise and sustainably utilise digital services, thereby maintaining competitiveness in domestic and export markets.

Indian Economy And Exports
The economic survey cited the share of MSMEs in all-India manufacturing output during the year FY22 was 35.4 per cent. Data Dissemination Portal of Directorate General of Commercial Intelligence and Statistics (DGCIS) states that the share of export of MSME-specified products in all-India exports in 2023-24 was 45.7 per cent.

Between January and June 2024, India had a trade surplus with 151 countries, representing 55.8 per cent of its exports and 16.5 per cent of its imports, totalling USD 72.1 billion. The biggest surpluses were with the USA (USD 21.0 billion) and the Netherlands (USD 11.6 billion).

However, India also had a trade deficit with 75 countries, which accounted for 44.2 per cent of its exports and 83.5 per cent of its imports, resulting in a USD 185.4 billion deficit, much larger than India's overall trade deficit. This situation highlights the need to reduce reliance on specific imports and strengthen domestic production. 

India has a significant trade deficit of USD 108.1 billion with ten out of the 23 countries that supply over 65 per cent of India's imports of various industrial products, including electronics, machinery and chemicals. 

The imports from these countries include USD 50.4 billion from China, US$ 10.0 billion from South Korea, US$ 8.9 billion from Japan, USD 8.8 billion from Hong Kong, USD 7.3 billion from Germany, USD 6.1 billion from Malaysia, USD 5.2 billion from Taiwan, US$ 5.1 billion from Thailand, USD 4.8 billion from Vietnam, and USD 1.5 billion from Ireland. Most industrial products from Japan, South Korea, Malaysia, Vietnam, and Thailand can be imported without tariffs under India's trade agreements with these countries.

From January to June 2024, India exported USD 8.5 billion to China while importing US$ 50.4 billion, resulting in a trade deficit of USD 41.9 billion. This low export and high import make China India’s largest trade deficit partner. About 98.5 per cent of imports from China, or USD 49.6 billion, are industrial goods. China accounts for 29.8 per cent of India’s industrial goods imports and is the top supplier in all 8 industrial goods categories.

Central Initiatives 
Aimed at providing information on trade events taking place in different parts of the world, the Centre has notified about the creation of a trade connect e-platform to connect Indian exporters, MSMEs and entrepreneurs with various stakeholders. This includes Indian missions abroad, export promotion councils and various partner government agencies.

The platform is expected to provide international trade-related information and data, along with information on benefits available due to India’s free trade agreements (FTA) with other countries, said Union Minister of State (MoS) for Commerce and Industry Jitin Prasada in Lok Sabha.

The Centre has also implemented the remission of duties and taxes on exported products (RoDTEP) since 1 January 2021. The uncovered sectors such as pharmaceuticals, organic and inorganic chemicals and articles of iron and steel have also been put under the purview of RoDTEP since 15 December 2022. Now, such remissions are also available for the exports that take place from the special economic zones (SEZs) units and the advance authorisation holders.

Meanwhile, the report suggested that India urgently needs to invest in deep manufacturing to reduce its reliance on critical industrial imports, especially from China. While trade deficits in natural resources like crude oil and coal are less concerning, the growing dependence on imported industrial goods threatens India's economic sovereignty. To address this, India should focus on boosting domestic production, managing tariffs wisely, and negotiating trade agreements strategically.