In a report dated 22 January, the government think tank proposed setting up a National Project Management Agency (NPMA), offering viability gap funding (VGF), rolling out a rooftop solar scheme for MSMEs, and identifying clusters to adopt cleaner manufacturing practices. The effort is critical for a sector that contributes 45% of India’s exports, 30% of economic output, and employs around 330 million people. Mint explains the plan being firmed up with the MSME ministry and what it means for small businesses.
Why is there a need to decarbonise MSME operations?
MSMEs need to decarbonise operations to remain competitive in exports, with steep trade barriers related to cleaner manufacturing practices kicking in in India’s export markets. For instance, the EU’s carbon border adjustment mechanism (CBAM), a mechanism to curb less sustainable imports into the EU, began its definitive phase from 1 January.
“To fulfil the green ‘level’ product requirement of developed countries and regions, especially Europe and the Americas, etc., MSME processes (manufacturing, etc.) need to be decarbonised,” the report said.
The government is looking to bridge the gap between MSMEs, which may have lesser resources to shift to more sustainable operations, according to the report. “Upcoming regulations may necessitate changes to manufacturing processes or products and reshape long-term marketing strategies, affecting supply chains, insurance costs, and increasing financial and political risks,” the report said.
The report identified five key subsectors — textiles, paper, steel re-rolling, foundry and forging — that can contribute significantly towards improving energy-efficient manufacturing for immediate action. Some MSME clusters in the same sectors are also the most electricity-intensive, and have been identified for the green electricity roadmap.
What solution does the government propose?
For starters, the government’s think tank and the MSME ministry have called for the creation of the NPMA, and have given a broad mandate to this body. The NPMA will herald this decarbonisation plan by working with MSME clusters and industry associations to aggregate demand for energy efficient machinery, green power generation, and alternate fuels.
For retrofitting and replacing old machinery in MSME clusters with more energy-efficient machinery, the government plans to identify implementation agencies—energy services companies (ESCOs)—after the NPMA aggregates demand for the same. ESCOs will cover the upfront costs of this new machinery, and MSMEs can repay ESCOs from the savings created from reduced operation costs, the plan said.
The plan will also provide incentives to manufacturers of energy-efficient technologies, with a ₹6,000 crore VGF proposed for them.
The MSME ministry along with the Bureau of Energy Efficiency (BEE) will identify 6-7 technologies which can provide more than 20% savings for businesses, and manufacturers of these technologies will be eligible for the VGF support, according to the plan.
For green electricity generation, the plan proposed a ₹7,000 crore scheme for the installation of rooftop solar in MSMEs up to 3 kWh, along the lines of the new and renewable energy ministry’s PM Surya Ghar Muft Bijli Yojana.
Under this flagship scheme, the government provides subsidies for the installation of rooftop solar units, as well as low-interest, collateral-free loans. The proposed rooftop solar scheme for MSMEs will run for five years and target 1-1.5 million enterprises, according to the 22 January report.
Also, the plan called for Renewable Energy Service Companies (RESCOs) to install solar energy facilities in MSMEs, reducing the upfront cost for small businesses, and giving them access to affordable green power.
The MSME ministry will also work with the Petroleum and Natural Gas Regulatory Board (PNGRB) to facilitate the adoption of natural gas in MSME clusters instead of coal, pet coke, furnace oil, etc, which result in higher greenhouse gas emissions.
What steps has the government already taken for the MSME sector’s green transition?
This is not the first time the government has attempted to aid the country’s MSMEs for greener operations. One such solution was the launch of two schemes under the MSME ministry’s green portal – MSME-Gift (Green Investment and Financing for Transformation) and MSME-Spice (Scheme for Promotion and Investment in Circular Economy). Both schemes were launched in December 2023, with a cumulative outlay of ₹950 crore. While the Gift scheme is slated to end in March 2026, the Spice scheme will run till March 2027.
Under the Gift scheme, which has an outlay of ₹478 crore, micro and small enterprises can avail benefits in two ways—interest subvention and risk-sharing facilities. Under the Spice scheme, the government provides a capital subsidy for circular economy projects in brownfield projects.
How will the switch impact MSMEs?
Adapting to cleaner manufacturing practices is expensive for cash-strapped MSMEs, according to experts.
Gurudas Nulkar, professor and director, Centre for Sustainable Development at the Gokhale Institute of Politics and Economics, earlier told Mint that Indian MSMEs will bear the brunt of carbon taxes imposed by importing countries, and will have to cut down emissions to be eligible for exports.
India’s manufacturing sector MSMEs operate on thin margins and low working capital, making the energy transition a challenge, he added.
