Introduction AI has the potential to transform India’s small-enterprise ecosystem, enabling it to grow and compete globally. India’s MSMEs are a dynamic force, driving economic growth and promoting innovation in numerous industries. Nevertheless, many MSMEs are yet to realize their full potential because of constraints such as operational inefficiencies, limited scale and restricted access to national and global markets. These issues not only hinder the MSMEs’ growth in the short term but also limit their ability to become more competitive in the longer run. AI, with its transformative capabilities, offers novel ways of tackling these challenges and will enable them to boost productivity, become more competitive and enhance their resilience. Understanding the context is important. MSMEs are the cornerstone of India’s economy. They accounted for as much as 30% of India’s GDP in 2023, nearly half the country’s exports (by value)2 and employed more than 230 million people in 20243 – second only to the country’s agriculture sector. In addition to serving as drivers of industrial development, exports and employment, India’s MSMEs have become important nodes in the nation’s supply chains, integrating with larger companies4 to enhance their efficiency. They are also drivers of affordable innovation, often creating cost-effective solutions, while their focus on sectors such as textiles, handicrafts, leather goods and engineering components helps India diversify its exports. MSMEs also play a crucial role in promoting regional development, often starting up in rural and semi- urban areas where they act as significant employers, particularly in industries such as handicrafts, light manufacturing and food processing. They support rural economies by adding value to agricultural produce and creating non-farm income opportunities. They can absorb both skilled and semi-skilled labour, which reduces income inequalities and regional disparities in the country. Of the total workforce employed by registered MSMEs, 45.4 million are women,5 demonstrating the sector’s contribution to women’s employment. The role that MSMEs play in reducing regional and gender imbalances makes them a cornerstone of India’s economic strategy and its pursuit of inclusive growth. Several MSMEs have also sprung up in emerging green industries such as renewable energy, organic farming and waste management, which will help India meet its environmental commitments. Strengthening the MSME sector is thus essential if India is to attain its ambition of becoming a $7 trillion economy – the world’s third largest – by 2030.6 of India’s GDP in 2023 was contributed by MSMEs, underscoring their role as the cornerstone of the national economy.30% Transforming Small Businesses: An AI Playbook for India’s SMEs 6

Transforming Small Businesses 2025