India’s manufacturing small and medium enterprises (SMEs) reported improved business conditions in the October to December 2025 quarter and signalled rising confidence in hiring and capital expenditure in early 2026, even as geopolitical uncertainty persists, a survey by the PHD Chamber of Commerce and Industry (PHDCCI) showed.
The PHDCCI SME Market Sentiment Index, a quarterly survey of 3,000 manufacturing SMEs across India, showed the SME Business Activity Index (SME-BAI) rose to 58.9 in Round 3 from 58.3 in the previous quarter, remaining firmly above the 50-mark that separates expansion from contraction. The improvement points to sustained momentum in demand, employment and supply-chain conditions, according to the report.
India’s overall economic expansion showed signs of a slight meltdown in December 2025, with growth in high-frequency activity indicators easing from the previous month. According to the Icra Business Activity Monitor, year-on-year growth in economic activity moderated to about 10.3 per cent in December, down from 10.7 per cent in November, indicating a modest cooling in momentum toward the end of the calendar year.
PHDCCI said the rise in the activity index reflected better new orders, improved employment conditions, faster supplier delivery times and higher inventories, indicating restocking in anticipation of future demand. Purchasing managers are often among the earliest to detect changes in demand and supply, making the index a leading indicator of economic activity.
New Orders And Employment Improvement
New orders strengthened further, with the New Orders Index rising to 63.3 in Round 3 from 61.7 in Round 2, signalling an uptick in demand conditions during the quarter. Output and production remained stable at 63.3, suggesting that SMEs were able to sustain manufacturing activity without major disruptions.
Employment showed a notable improvement, with the Employment Index rising to 55 from 51.7 in the previous round, indicating gradual job creation in the sector. PHDCCI said this gain came despite ongoing geopolitical uncertainty, underscoring resilience in domestic manufacturing sentiment.
Hiring plans also improved modestly. About 27 per cent of respondents expect an increase in hiring in the January to March period, compared with 23 per cent earlier, although half of the surveyed firms reported no immediate hiring plans. PHDCCI said the data points to selective recruitment rather than broad-based expansion in employment.
Showing a critical risk to the success of the country’s flagship job creation programme, a TeamLease Services report stated that micro businesses and startups in India, the very segment that stands to gain most from government hiring incentives of up to Rs 3,000 per employee per month, show alarmingly low awareness of the scheme.
Only 5.4 per cent of startups, micro and small businesses surveyed were aware of the Pradhan Mantri Viksit Bharat Rozgar Yojana (PM-VBRY), despite the scheme being explicitly designed to support smaller employers through wage-linked incentives and workforce formalisation, the TeamLease Services report said.
TeamLease finding stands in sharp contrast to awareness levels among large enterprises, which stood at 83.1 per cent, showing what the report calls a “size paradox”, where those most in need of support are the least informed. India's unemployment rate was around 4.8 per cent in December 2025, with rural joblessness stable at 3.9 per cent but urban rates rising to 6.7 per cent, according to the Periodic Labour Force Survey (PLFS).
An International Labour Organisation (ILO) report revealed that the unemployment rate of youth is higher than for adults. It has been rising over the past several decades, from 5.6 per cent in 2000 to 6.2 per cent in 2012 and then increasing threefold, to nearly 18 per cent in 2018 and reaching around 15.1 per cent in 2020.
Notably, PHDCCI stated that the supply-chain pressures also eased. The supplier delivery time index, measured on an inverted basis, improved as delivery times became faster, indicating reduced logistics constraints. Inventories of inputs increased to 68.3 from 66.7, suggesting that firms were building stock in anticipation of a stronger recovery in demand.
Cautiously Optimistic Indian MSMEs
Looking ahead, SMEs appear cautiously optimistic about the January to March 2026 quarter. The SME Business Outlook Index (SME-BOI) rose marginally to 60.8 in Round 3 from 60 in the previous round, reflecting steady confidence in near-term prospects.
While nearly half of respondents ( 47 per cent) expect no change in business activity in the next quarter, 40 per cent anticipate an improvement, up sharply from 33 per cent in Round 2. This suggests that expectations of growth are broadening, even if many firms remain guarded.
However, experts tracking the sector believe global trade disruptions, including US tariffs, will shape 2026. Demand conditions are expected to remain uneven, with stress in rural and export-linked segments partly offset by domestic consumption and public capital expenditure. Access to credit may improve gradually through digital lending and fintech partnerships, though gains are likely to remain uneven.
They noted that technology adoption and platform-based supply chains are set to emerge as key competitive differentiators. At the same time, they expect a widening gap between resilient, formalised MSMEs and smaller, informal units struggling with compliance costs, liquidity constraints and execution challenges.
The strongest signal of confidence came from capital expenditure intentions. As many as 60 per cent of respondents expect an increase in capital spending in the next quarter, indicating optimism about long-term growth prospects. PHDCCI attributed this sentiment to factors such as GST reforms, expectations of lower interest rates and a relatively benign inflation environment.
The report said fiscal policy could further influence SME sentiment in the coming quarters. It noted that a lower fiscal deficit, continued emphasis on capital expenditure and targeted sector support could improve the outlook for infrastructure-linked and food processing industries. Enhanced credit support and reduced borrowing costs could also lift business confidence and investment planning among SMEs.
However, industry participants flagged key risks, including rising energy prices, the impact of natural calamities on input costs, and the need for stricter enforcement of the 45-day payment rule for MSMEs, including by government entities and public sector undertakings. They also called for a review of quality control orders on imported machinery and components to ensure smoother operations.
The PHDCCI index is based on equal-weighted responses across manufacturing sectors and is designed to help policymakers, central banks and investors track trends in SME activity and outlook, the chamber said. |
