EU Regulations will Likely Hurt MSME Exporters: FIEO’s Ajay Sahai

As international trade experiences a reset spurred by climate rules, non-tariff barriers, protectionist measures, and new trade agreements, Indian exporters, including small businesses, are coming to a point of reckoning. It is no longer enough to just fulfil demand; exporters need to navigate changing standards such as the EU’s deforestation and ecodesign rules, and develop traceable supply lines and adjust to fragmented digital infrastructures. All these changes are reshaping trade's boundaries, especially for MSMEs, which lack the digital depths and institutional backing enjoyed by major exporters.

Talking to FE Aspire, Ajay Sahai, Director General and CEO of India’s apex exporters’ body Federation of Indian Export Organisations (FIEO), provides an unvarnished view of Indian trade and MSMEs. From assessing MSMEs’ preparedness for the EU’s upcoming export regulations to forging a hub-and-spoke framework for supply chains and tapping new export opportunities for organic and GI-tagged items, Sahai describes both the incomplete agenda and new blueprint for India's next global trade chapter.

With rising non-tariff barriers and climate rules, are Indian exporters, particularly MSMEs, ready for the next phase of global trade?

While exporters are sensitised about the fact that they need to be ready for the rules coming into effect in January 2026, I won’t say that they are ready for that. Where I see MSMEs likely to be impacted is the European Union’s (EU) Deforestation Regulation (EUDR) (ensuring goods are not produced on deforested land) and Ecodesign for Sustainable Products Regulation (ESPR) (aiming to improve the sustainability of products).

However, I think that through product traceability (ability to track a product’s journey from its origin to its final destination), one can see whether products are EUDR and ESPR compliant. In domestic operations also we are looking into barcoding in a big way to capture the traceability to the extent possible of products.

As we move ahead, I don’t see it as a challenge only for exports. It can probably be a requirement in domestic trading also as a lot of companies in the retail trade in India are looking into traceability in a big way.

So, exporters are definitely sensitised about regulations but probably most of the SME exporters are still not prepared. For that, export promotion organisations and the local associations need to work together because these kinds of non-tariff barriers will emerge as a great challenge for SME exports from the country.

You see MSMEs getting impacted by these new regulations?

Absolutely, because while these regulations will apply to the importers of countries, those importers in turn will ask for relevant information from the Indian exporters. Unlike large exporters, which are fairly organised with their entire data processed in a digital form, the challenge is for MSMEs where a lot of operations remain fragmented. 

However, we are in talks with different sectors such as leather, wherein you have to trace the location from where the raw skin of animals such as cattle has come, where the cattle are raised -- on deforested land or forested land. Basically, you are talking about complete traceability. While the good thing is that many organisations and institutions have come up with software to capture such information, I will admit that we have a lot of distance to cover and we are probably running short of time.

In the China plus strategy, do you see anything missing while the government provides policy incentives? What role do you see for MSMEs?

I think building supply chains is important. For instance, in the mobile phone sector, the more exports we are doing, the more parts and components we have been importing, particularly from China. Hence, we now have a PLI scheme for parts and components. It is a lesson that while we are targeting the end product, we also need to build a complete supply chain of parts around that product to have an edge.

We have seen this happening in the automobile sector. When the global auto companies came to India, they helped develop ancillaries for manufacturing parts and components. We are looking at the hub-and-spoke model where we attract large companies acting as hubs and Indian MSMEs becoming spokes and working as ancillaries to supply parts and components. 

Large companies’ focus on quality will also lead to global players emerging from ancillary MSMEs. For instance, automotive systems and components maker Sona Comstar, which started as an ancillary of Maruti Suzuki, is today a global enterprise. I see similar success stories emerging in other segments like mobile and other electronic products.

What reforms in India's trade infrastructure are required currently to push MSMEs further?

While we have done a lot of work in digitisation, connectivity is a big issue in data flowing through different platforms. For example, there is an e-filing services portal ICEGATE, there is an EDPMS portal for tracking export transactions, and other portals. When the information flows from one portal to another, there's a significant loss of data or inaccuracies are there in the data. 

However, the good thing is BharatTradeNet (BTN) platform for international trade for trade documentation and financing solutions, proposed in the budget in February this year. Once you have this unified platform for every agency involved in trade, data won’t be flowing from one portal to another and will be easily accessible. This will save time and avoid the need to submit data to individual portals separately. 

The new platform, which I expect to be functional in a year's time, will be very appreciable from the MSME perspective.

India talks of self-reliance in exports, but our export strategy relies on deep global integration. Is there a risk of policy contradiction?

If you look into our emphasis on Make in India, it is about producing goods for domestic consumption and exports as well. Even with respect to foreign direct investments (FDI) we are getting, it is not only because we have a huge population, but we want them to capitalise on India's integration with the world through our free trade agreements (FTAs). That’s why there is slightly more focus on FTAs as global companies coming to India are not just looking into the Indian market, they also want to scale up with the advantage India has and use it as a hub for exports. So when I'm looking into India's self-reliance, it is not shunning away the world but probably developing domestic capabilities since we have the advantage of human capital.

Global companies using the Indian market as a hub for their exports? Can you elaborate?

What I mean is that FTAs should not only be looked at from the perspective of exports. They are an instrument to attract FDI too. We require global companies to come to India and bring the global scale to India. If you have an FTA, they will probably be much more interested in coming here and supplying across countries with which India has an FTA.

So, from an FTA perspective, I'm looking into the country not only for supporting the domestic manufacturer but also to attract global companies because investment is flown into countries which have very effective FTAs. India now has to follow the same policy to attract investment.

As global trade becomes more protectionist, how can India continue to stay relevant despite not being part of trade blocs like RCEP and CPTPP?

The number of protectionist measures taken by different countries recently far outnumber the measures taken in the past. In fact, between October 2023 to October 2024, 169 new protection measures were taken by countries, impacting global trade to the extent of $887 billion globally. So countries are looking inward, and that's a challenge.

Probably, the world is looking into the realignment of the global value chain, wherein the US is making a very conscious effort to bypass China. So, if any country wants to bypass China, you have to look into a country which can match the scale at which China is operating. From that perspective -- whether it's the resources or capabilities, India is there, and that's why our focus has been to integrate ourselves in the global value chain across sectors and not confined to just automobile, gems and jewellery, and pharma sectors. Once you are integrated into the global value chain to a large extent, you are addressing the protectionist measures.

Given the persistent trade deficit, should India prioritise trade balance or long-term strategic gains?

I think that for a developing country like India, where the economic requirement is growing by leaps and bounds, we should not be unduly worried about the trade deficit. Though we have a deficit of $282 billion on the goods front in FY25, the services side has a surplus of $188 billion. So the deficit is roughly around $94 billion, but I'm not worried about it.

Once we develop domestic capabilities, the deficit will come down. Importantly, India is not using its forex reserves to match its trade deficit. India’s foreign remittances are also robust, and the good thing is that they are coming from large economies like the US and the UK and not largely from the Middle East. This shows that we are getting into the high-end of services. I would have been worried if I were using my forex reserve to finance the deficit.

What latest green field opportunities do you see for MSMES today?

For MSMEs, there is a huge opportunity in organic products. There is a significant opportunity in GI (Geographical Indication) products as well. While there are thousands of GI products, I think we are not marketing GI in the right way. We have to look into marketing them globally. Currently, the sum total of GI exports is not very encouraging.