Despite their economic significance, India’s MSMEs face barriers in accessing green finance, from high interest rates to lack of sustainability data. Budget 2025 supports growth, but does it enable a low-carbon transition?
Micro, Small and Medium Enterprises (MSMEs), the backbone of the global economy and contributor to 30% of India’s GDP, received a shot in the arm in the Budget announcements this year with enhanced investment and turnover limits and benefits that allow them opportunities to expand in the clean and energy sectors. Despite the boost, expanding financial mechanisms and policy support are urgently required to accelerate MSME-led climate action and strengthen India’s green economy.
The sector’s scale comes with a climate cost—SMEs account for 40% of business-sector emissions in emerging markets, making their participation crucial for net-zero targets. However, small businesses often lack awareness and access to affordable green financing. Meanwhile, a limited understanding of the competitive advantages of sustainability further hinders their low-carbon transition.
Budget 2025: Key outlays for MSMEs
The 2025 Union budget has enhanced investment and turnover limits of MSMEs, which enables them to grow without losing their classification as an MSME, a status tied to certain benefits and schemes. Other key measures include enhanced guarantee cover (reducing lenders risk), lower collateral requirements and improved access to formal financing. Providing term-loans for first-time women, SC, and ST entrepreneurs, and credit cards for MSMEs will foster innovation, growth and inclusivity.
The Budget also unlocks new opportunities for supply chain MSMEs in clean and nuclear energy through the National Manufacturing Mission, National Critical Minerals Mission and the Nuclear Energy Mission. However, it does not adequately target finance mechanisms that are critical for MSMEs to integrate low-carbon development in their operations.
Existing climate finance landscape for MSMEs
Targeted programmes, funds, and schemes have enhanced MSME climate finance, most notably initiatives from the Small Industries Development Bank of India (SIDBI). In 2021, SIDBI launched a partial risk sharing facility with the World Bank for energy efficiency projects, resulting in annual energy savings of 205 GWH and reduction of 1,52,300 tons of CO2 by 2022. Additionally, it implements the recently launched Micro & Small Enterprise Green Investment and Financing for Transformation (MSE GIFT) Scheme, which supports green technology adoption by offering reduced interest rates and credit guarantee to MSMEs. SIDBI has also partnered with Tata Power to offer collateral-free financing for MSME rooftop solar installations.
While these initiatives demonstrate progress, they represent only the beginning of a much-needed transformation. Only 14% of MSMEs in India have access to formal financing, and even fewer benefit from climate finance mechanisms. Unlocking the large-scale climate finance needed to achieve net zero targets requires overcoming multiple barriers.
Challenges in scaling MSME climate finance
According to the SIDBI-D&B Sustainability Perception Index, the top challenges preventing MSMEs from adopting sustainable practices include the time taken to see financial benefits, uncertainty in returns, and difficulty in quantifying ESG investment outcomes to attract investors. Other barriers include limited access to capital markets, higher interest rates, stricter collateral requirements and absence of incentives.
To complicate this further, MSME-related sustainability data is scarce. Most small businesses are not required to report non-financial performance as Business Responsibility Sustainability Reporting (BRSR) remains non-mandatory for them. This data gap makes it challenging for financial institutions to assess small business’ green credentials, including climate impact and financial viability.
This creates a complex ecosystem for Indian MSMEs seeking to transition to sustainable practices and access climate finance. Targeted policy and financial solutions are key to unlocking the role of these enterprises in driving India’s low-carbon transition.
Recommendations beyond Budget 2025
To equip MSMEs for the net zero transition, the government should build a robust climate finance ecosystem that includes blended finance models, sector-specific green finance instruments, and impact investments. While the government has introduced credit guarantee schemes, financial institutions should be incentivised to include risk mitigation measures and low-interest green loans.
Next, establishing mandatory reporting for MSMEs under a unified system will help address some challenges. Many large businesses are now required to report supply chain emissions. Expanding BRSR to certain categories of MSMEs could standardise green reporting, bridge data gaps and increase investor confidence.
Additionally, MSMEs must be incentivised to adopt climate disclosures to remain competitive amidst emerging international regulations like the Carbon Border Adjustment Mechanism (CBAM). Sustainability compliance is no longer optional—without urgent action, Indian MSMEs risk falling behind in both domestic and global supply chains.
Building awareness and capacity must complement all the above measures to ensure MSMEs understand finance terms, available green finance options and regulatory compliance requirements. Providing technical assistance will enable them to implement sustainable practices.
India needs bold policy and financial solutions to drive MSME climate action. A rewarding and viable ecosystem for sustainable investments can empower and future-proof these enterprises. With the right support they can power India’s net zero ambitions.
Namita Vikas is the Founder & Managing Director of auctusESG and Swapna Patil is Manager – India of SME Climate Hub. Views expressed are personal.
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