MSMEs contribute 31.1% to India’s GDP, account for around 35.4% of its manufacturing and 48.58% of its exports, according to the Economic Survey 2025-26, tabled in Parliament on January 29, 2026. The sector comprises 7.47 crore enterprises employing over 32.82 crore people, making it the country’s second-largest employer after agriculture.
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For smaller businesses, the questions are practical: which problems can AI solve, what will it cost, and who can help implement it?
Puran Dawar, Co-Chair of the ASSOCHAM MSME Development Council and Chairman of Dawar Footwear, says industry clusters could help make AI more accessible by providing shared facilities, demonstrations and expert guidance.
“MSMEs need help solving specific problems, not just buying technology,” Dawar said, emphasising that adoption must go hand in hand with practical training for business owners and workers.
ET OnlineHowever, high costs, a shortage of expertise and concerns over data protection and legal liability could pose challenges for MSMEs looking to adopt AI.From potential to practical gains
A 2026 report by PwC India and the Observer Research Foundation (ORF), Unlocking the AI Edge for MSMEs, estimates that AI could create $135.6 billion to $149.9 billion in value for manufacturing MSMEs by 2035, assuming they account for half of India’s gross manufacturing value added.
The report also points to a separate opportunity for smaller businesses to supply the AI infrastructure and semiconductor industries, with potential demand of $100 billion to $150 billion for products such as wiring harnesses, chambers and cooling equipment.
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For MSMEs, the gains could extend beyond manufacturing. A joint report by Google and the India SME Forum estimates that wider AI adoption could unlock more than $490 billion in economic value for India’s MSMEs. It also says digital tools are already helping nearly 60% of MSMEs achieve double-digit revenue growth, while AI could improve business profitability by 30% to 35%.
The broader economic opportunity is significant, too. NITI Aayog’s ‘AI for Viksit Bharat: The Opportunity for Accelerated Economic Growth’ roadmap estimates that AI could unlock an additional $1.7 trillion for India’s economy by 2035, highlighting its potential to drive productivity and competitiveness across sectors.
Putting AI to work: What MSMEs can automate
For smaller businesses looking to move beyond experimentation, the starting point could be routine tasks that consume time, increase costs or lead to avoidable errors. The options range from general-purpose generative AI assistants to specialised tools integrated into accounting, inventory management and customer relationship management software.
Generative AI tools can help businesses draft product descriptions, prepare marketing material, summarise documents and respond to customer queries. AI-enabled accounting and workflow automation tools can assist with invoice processing, purchase orders and routine documentation, while more advanced agentic AI systems can coordinate multiple steps in a workflow. However, financial transactions, legal documents and other critical decisions still require appropriate human oversight.
Vijay Gopalakrishnan, partner at Deloitte India, identifies invoice processing, accounts payable and accounts receivable as potential areas for automation. He also points to marketing content, tax-related documentation and recruitment tasks such as drafting job descriptions and sourcing CVs as areas where AI can reduce routine work.
Beyond administrative tasks, specialised AI applications can help MSMEs improve production and customer service. Predictive maintenance systems can analyse equipment data to flag potential failures, while AI-powered demand forecasting and inventory tools can help businesses plan stock levels around changing orders.
Computer-vision systems can also be used to identify defects in manufacturing, although their suitability depends on the production process, data availability and implementation costs, the PwC-ORF report said.
For smaller firms selling through digital marketplaces, conversational AI and chatbots can support customer service and sales without requiring a large support team. AI-powered language tools and interfaces in Indian languages could further widen access for entrepreneurs with limited English proficiency or digital skills.
Supply-chain management and logistics offer another opportunity, particularly for MSMEs operating with tight margins and limited room to absorb delays or rising input costs.
The PwC-ORF report estimates that AI-based applications, including route optimisation, could improve MSMEs’ logistics performance and reduce delivery timelines by 15–20%.
Praveen Vashistha, founder of Gxpress Solutions, a global logistics provider, says AI can help businesses anticipate supply-chain disruptions by analysing historical shipment data, weather conditions, transport trends, supplier performance and changes in the availability of supplies.
“AI technology assists companies to determine future disruptions by processing historical shipment data, climatic conditions, transport trends, supplier performance and changing market for supplies,” Vashistha said.
The choice of tool, however, should depend on the problem a business wants to solve. While off-the-shelf AI applications may be sufficient for routine tasks, production monitoring or supply-chain optimisation may require specialised software, integration with existing systems and reliable operational data. Starting with a specific use case and measuring the resulting savings or productivity gains can help MSMEs determine whether a tool is worth expanding across the business.
Why AI adoption remains a challenge
For MSMEs, the challenge is not just experimenting with AI, but integrating it into everyday business operations. While adoption is growing, relatively few businesses have made the technology central to how they work.
“The key challenge for MSMEs is making adoption commercially viable. Many businesses operate with legacy equipment, fragmented data and a limited pool of people who understand both manufacturing and AI. The cost and complexity of integrating sensors, software and existing systems can also slow adoption,” a spokesperson from Harkesh Rubber, an MSME manufacturer specialising in precision rubber components and sealing solutions, told ET Online.
A 2024 NASSCOM–Meta studyfound that around 65% of tech MSMEs struggle with limited awareness of available AI tools and resources, while 72% highlighted the need for AI training programmes.
Dun & Bradstreet India’s 2026 study, Business Enterprises of Tomorrow – The AI Moment for India’s MSMEs, based on a survey of 210 MSME leaders, found that 76% used AI in some form, but only 5% had made it central to their operations. The gap between experimentation and wider adoption is also evident among Indian enterprises more broadly. Adobe’s 2026 State of AI Readiness Report found that only 6.7% of surveyed Indian enterprises had scaled AI across multiple workflows, while 40% remained at the pilot or deployment stage for agentic AI.
“Businesses often form perceptions about AI based on incomplete or inaccurate information circulating through online sources, social media and informal networks, rather than engaging with experts to understand its practical applications. This can reinforce misconceptions about AI’s relevance, safety and cost-effectiveness for smaller enterprises, discouraging them from exploring opportunities where the technology could deliver meaningful business value,” said Deloitte India’s Gopalakrishnan.
For MSMEs with limited legal and technical expertise and little bargaining power, choosing the wrong AI solution can be costly. They risk losing their investment, getting locked into a vendor’s system and damaging customer trust.
The risks are particularly important when AI tools process personal information about customers, employees or other individuals.
“Data collection, processing and lawful purpose/ utilisation of sensitive information along with consent for retention of personally identifiable information of data principals (customers, vendors and employees) are among the most significant legal uncertainties faced by MSMEs when deploying Enterprise AI in their businesses,” Tarun Kher, Partner, Risk Advisory, Business Advisory at BDO India told ET Online.
“Data Protection Impact Assessment (DPIA) and Data Minimisation are two key considerations which MSMEs must enforce before deployment of AI systems. MSMEs should train AI systems to collect and process personal data for a clearly defined business purpose while documenting the lawful basis and keeping the data principals informed transparently,” said Kher.
What could accelerate AI adoption?
For MSMEs to make the most of AI, access to technology alone will not be enough. Industry bodies, technology providers and the government will need to work together to bridge gaps in funding, infrastructure and skills, particularly for smaller manufacturers seeking to improve productivity and compete in global markets.
“For MSMEs, a phased approach is therefore important, starting with specific use cases where AI can deliver measurable operational gains and then scaling across the organisation. With the right technology support and skilling, AI can help Indian MSMEs improve quality, efficiency and reliability while becoming more competitive globally,” said Harkesh Rubber’s spokesperson.
There is already a government framework that could support wider adoption.
The Ministry of Electronics and Information Technology has approved the IndiaAI Mission with a budget of Rs 10,371.92 crore. The mission covers seven areas, including computing infrastructure, datasets, AI applications, skills, startup funding and safe AI. It aims to help businesses use AI to improve productivity and competitiveness.
The government also conducts studies with industry and research institutions to track digital adoption among MSMEs. NITI Aayog’s Output-Outcome Monitoring Framework is used to assess the impact of government schemes and interventions, Union Minister of State for MSME Shobha Karandlaje said in a written reply in the Lok Sabha.
