In the narrow lanes of India’s industrial clusters, whether it is Ludhiana’s foundries, Surat’s textile mills, or Pune’s automotive industries, a silent struggle is unfolding. As the global economy increasingly swivels towards clean manufacturing, the ripple effects are hitting India’s small and medium enterprises (SMEs) hardcore.
Under the National Steel Policy 2017, India aims to scale steel production to 300 million tonnes by 2030, with over 305 MSMEs units established in the last five years, collectively producing 33 million tonnes (MT) of steel annually. These firms, the bedrock of India’s industrial economy, now face a storm: international trade is erecting green barriers like the European Union’s Carbon Border Adjustment Mechanism (EU CBAM), domestic firms are compelled to meet sustainability requirements to match global norms and the cost of compliance: technology upgrades, certifications and carbon audits are rising faster than the capacity to ramp up. Developing countries face a stark paradox: constrained growth trajectory, and industrial firms on the periphery of a looming metal trade war, where tariffs are the new economic weapons.
With the EU CBAM almost in place under the “Fit for 55” package and similar proposals gaining ground recently in the USA and UK, India now faces a trifecta of climate-linked trade barriers that could disrupt its industrial competitiveness and economic growth. India’s External Affairs Minister calling CBAM “unacceptable” and despite pertinent efforts during the India-UK Free Trade Agreement negotiations, India failed to secure relief from the UK’s CBAM, which is set to impose tariffs of up to 35% on carbon-intensive industries. Simultaneously, with the USA now advancing to its own Border Carbon Adjustment (BCA) agenda through proposals like the Foreign Pollution Fee Act (FPFA), the pressure mounts further. The layering of the FPFA over EU and UK CBAM compounds the risk of market exclusion for carbon-intensive exports for India, while also raising compliance costs for Indian manufacturers across sectors.
While over 99% of emissions from EU CBAM covered goods remain in scope, the 50-tonnes exemption for small exporters is largely illusory. Many Indian firms operating in carbon-intensive sectors and serve as Tier 2 and Tier 3 suppliers within EU-linked value chains, passing compliance costs downstream and rendering any nominal relief fleeting. Initial projections already estimate a GDP impact of 0.05%, with broader effects on trade competitiveness looming larger. At the heart of this risk lies India’s iron and steel sector – a key pillar of industrial growth and export performance, according to Wood Mackenzie. In FY23, India’s iron and steel exports to the EU accounted for 23.5% of the total steel exports, valued at over USD 13 billion. However, amid rising tariffs and regulations, the sector shows signs of softer growth. For the second consecutive year, India remained a net steel importer, with imports in FY25 rising by 9.2% i.e., 10.5 million tonnes, reversing the country’s long-standing trade surplus. This downturn is particularly alarming for SMEs concentrated in CBAM-exposed sectors, such as iron and steel, where they constitute nearly 33–35% of crude steel capacity. As the sector contributes nearly 2% to India’s GDP, any prolonged stagnation could pose a significant threat to the country’s manufacturing-led growth ambitions, often fuelled by SMEs.
As the world transitions to clean manufacturing and green regulations, India’s SMEs face rising costs and a potential decline in export opportunities. Aggregators and merchant exporters consolidate shipments from small players that often exceed the exemption threshold, resulting in compliance costs being effectively passed down by global buyers. As a result, the exemption under the revised EU CBAM regulations creates a misleading impression of relief, offering no real protection for SMEs. The decline in exports may flood the domestic market, unlikely to rise proportionally, resulting in supply surfeits and price strains. The growing focus on sustainability is prompting large domestic firms to impose international standards, effectively replicating CBAM-like conditions at home. This internalization of trade-linked carbon compliance puts an excessive burden on India’s SMEs, many of whom lack the technical and financial capacity to meet these standards.
The result is a cascading impact: smaller manufacturers are squeezed, industrial competitiveness erodes, and sectors already struggling to adapt to the global green transition are further strained. A recent study by ICRIER highlights that the green barriers lead to increasing vulnerability and add additional burden on the SMEs. Firms with higher energy intensity and lower technological readiness would face the heat of the carbon tax levied on their emission-intensive products. In comparison, large firms having high energy intensity and high technological readiness are better prepared to face the adverse, as a better financial position drives their adaptability to changing trade dynamics. Using Computable General Equilibrium (CGE) modelling, the study estimated that the imposition of EU CBAM leads to a significant reduction of 24% in iron and steel exports for India.
The WTO’s Trade Cost Index further highlights that there is a persistent and growing disparity in export costs between large enterprises and SMEs in India. This structural gap limits the global competitiveness of smaller firms and is expected to widen further as trade regulations become more complex and climate-linked. Rising climate-linked regulations and green compliance demands are tightening the noose – raising costs further and threatening both global competitiveness and domestic viability as green supply chain standards trickle down. While frameworks for green transition and adoption of low-carbon technology already exist, their accessibility and implementation remain major challenges for SMEs. To effectively insulate them, the approach must go beyond policy design to focus on practical solutions, i.e., by ensuring certification processes are simplified and agile, green technology subsidies are easily accessible and tailored to SME needs, and embedding affordable, user-friendly MRV (Monitoring, Reporting, Verification) systems into business operations.
Building resilience to trade shocks is not just a question of equity – it is a strategic imperative to secure India’s position in the evolving global economy. Failing to protect and equip SMEs will undermine India’s export competitiveness, stall its industrial decarbonization, and derail its ambitions to lead the global cleantech economy. Additionally, BCA mechanisms should incorporate meaningful differentiation for SMEs in developing countries, and reciprocal climate responsibilities to avoid entrenching inequities and undermining both climate and development goals alike.
The views expressed are the author’s own.