Since MSMEs in a cluster are closely knit and depend on each other, any transformation programme can maximize its impact by taking a cluster-based approach.MSMEs by sector India has a well-balanced MSME landscape, with almost an equal number of MSME organizations operating in the manufacturing, service and trade sectors. According to the annual report of the MSME ministry, the trade sector has the highest number of enterprises, with a 36% share of the total. Trade is followed by the service sector, with a 33% share, and manufacturing with a 31% share.15 Within manufacturing, services and trade, there are many MSME industries operating across India. Some of the major MSME industries in the country include textiles, pharmaceuticals, fast-moving consumer goods (FMCG), vehicle components, footwear, leather and electronics. Each of these industries has its own challenges and needs and will therefore have its own differing AI use cases that can support its business operations. The implementation of AI solutions will vary across these different MSME industries. For example, an FMCG manufacturer with a consumer-facing business may find digital marketing and customer engagement tools to be of great value in its business, while a vehicle component manufacturer may use AI- based virtual prototyping to reduce prototyping costs.MSME clusters MSME organizations in India are typically found in geographically concentrated groups that specialize in a particular industry, product or service. These clusters enable a shared ecosystem of suppliers, buyers, skilled labour and infrastructure. This leads to cost efficiency, knowledge-sharing and economies of scale. India has thousands of MSME clusters spread across different states. For example, there are vehicle components clusters in Chennai, textile clusters in Tirupur and Surat, and a pharmaceutical cluster in Pune. Since MSMEs in a cluster are closely knit and depend on each other, any transformation programme can maximize its impact by taking a cluster-based approach. In the case of AI-adoption programmes, different clusters will have different AI use cases, challenges to AI adoption and so on. A cluster-based approach will ensure that the programme stays relevant for the target MSMEs and ensure adoption of AI at an accelerated place. AI in microenterprises BOX 1 Microenterprises form the backbone of India’s MSME ecosystem. These businesses are often single-owner or family-run, with a very limited scale of operations. Microenterprises represent more than 99% of all MSME organizations in India. They also contribute significantly to employment – employing around 97% of the total workforce in the MSME sector.16 Microenterprises are characterized by limited investment and a small scale of operations. Around 85% of them employ no more than three people, with less than 2% employing more than nine people.17 As per Udyam registration data,18 about 85% of microenterprises operate with investments of less than INR 5 lakh (c. $5,800) and almost 99% of them operate with investments of less than INR 25 lakh (c. $29,200).19 Furthermore, 92% of microenterprises have a turnover of less than INR 50 lakh (c. $58,400), with 70% having an annual turnover of less than INR 10 lakh (c. $11,600).20 This is evidence of the small scale of these enterprises and of their limited financial resources. They include the likes of fruit- and-vegetable vendors, repair shops and cottage industries, usually with very informal operations. The AI journey for these microenterprises will naturally differ significantly from that of small and medium enterprises (SMEs). Most of the enterprise owners lack any understanding of AI. Most transactions are in cash with no formal documentation. Records are mostly maintained on paper, and these are not digitized. At such a limited scale of operations, any attempt to establish digital systems in these enterprises would be impractical. At the same time, AI has the potential to deliver significant value to microenterprises, even at a small scale of operations. Table 2 outlines some of the key challenges faced by microenterprises in India and how AI-powered solutions can help address them. Transforming Small Businesses: An AI Playbook for India’s SMEs 11

Transforming Small Businesses 2025