“Supply Chain Finance as a Catalyst for MSME Resilience in India–EU FTA: Prospects, Financing Models, And Sustainability Imperatives”

Abstract

Micro, small, and medium enterprises (MSMEs) in India confront acute financing gaps and sustainability compliance hurdles amid the evolving India-EU Free Trade Agreement (FTA), concluded in January 2026, which promises enhanced market access but imposes stringent EU Green Deal regulations like the Carbon Border Adjustment Mechanism (CBAM). This theoretical paper aims to construct a conceptual framework integrating supply chain finance (SCF) mechanisms—such as reverse factoring and dynamic discounting—with MSME resilience and ESG compliance in the FTA context. Drawing on secondary sources including EU policy documents, RBI reports on MSME trade finance, WTO publications, and Ministry of Commerce data, the analysis reveals SCF's potential to bridge liquidity shortfalls, where formal channels meet only 28.5% of India's $284 billion export needs, while enabling adherence to EU carbon standards. Key conceptual insights highlight SCF as a transaction-cost reducer and liquidity stabiliser, fostering export competitiveness for MSMEs, contributing 28% to India's exports. Policy implications advocate institutional reforms for fintech-enabled SCF platforms, regulatory harmonisation, and green financing incentives to bolster sustainable trade integration and position Indian MSMEs for resilient participation in EU value chains. This framework underscores SCF's role in aligning financial innovation with trade-policy imperatives.