India needs a focused policy for medium enterprises to boost exports and jobs: NITI’s Arvind Virmani

India’s policy approach towards MSMEs needs to be more targeted, especially when it comes to medium enterprises, according to Arvind Virmani, Member of NITI Aayog.

In an interview with CNBC-TV18, Virmani said that while there are several schemes available across technology, credit, and skilling, “only a subset of them are actually useful for medium enterprises.” He stressed the need to move away from a one-size-fits-all approach and instead build tailored interventions for this segment.

Medium enterprises, he noted, play a crucial role in both exports and domestic supply chains, particularly in labour-intensive sectors like textiles and electronics. “They are closer to the frontier,” said Virmani, referring to their need to compete on quality and cost in international markets. This makes their policy needs distinct from those of micro and small units.

He also pointed out that skilling efforts need to become more practical and industry-specific. “The stitching skills required for cotton may be very different from those needed for leather,” he explained, adding that mid-level, hands-on skills are often more important than high-end technical training in these industries.

NITI Aayog recently conducted a study focused on medium enterprises, identifying eight central schemes that apply to this group and making additional recommendations to strengthen them. The aim is to unlock the sector’s export potential, particularly given that just 0.3% of MSMEs account for 40% of all MSME exports.

Virmani also weighed in on the sharp decline in net FDI inflows to just $353 million in FY25, calling it a temporary outcome of several overlapping factors. One of them, he said, was the removal of the Dividend Distribution Tax (DDT), which led foreign companies to remit retained earnings. “It created an opportunity for foreign companies to remit retained earnings they had held in India. So that’s a temporary phenomenon,” he said.

He also pointed to external factors like stronger returns in the US and potential diversification into Southeast Asia, especially Vietnam. However, he maintained that net FDI should bounce back in the coming years. “We must still aim to increase gross FDI significantly and not rest on our previous peaks,” he cautioned.

Looking ahead to FY26, Virmani said India must double down on improving investment attractiveness at the state level. NITI Aayog is working on a new index to help states identify where they lag in terms of infrastructure, policy clarity, and skilling. “We don’t direct states but promote competitive and cooperative federalism,” he said, adding that states must also work on upgrading legacy industrial estates and refining local implementation.

Below is the excerpt of the interview.

Q: What do you make of India’s current policy structure to support MSMEs, and why is it inadequate?

Virmani: One of the important points in the budget was the focus on MSMEs, among other things, particularly the emphasis on labour-intensive exports to generate employment. In NITI, we had commissioned a study. Of course, when we talk about MSMEs, we include micro, small, and medium enterprises. NITI wanted to drill down further into these somewhat diverse elements of industry. Most of them are informal; some are part of the formal sector. So, for that purpose, this study was launched, on medium-sized enterprises in particular, to see what schemes are available and how they are performing.

There are a whole bunch of schemes in terms of technology adoption, credit, skilling, etc. The aim of the study was to drill down and see which of them were applicable to medium enterprises, how they were used, and then provide further recommendations. The study found that about eight schemes are applicable, and it made some other recommendations.

Q: When it comes to incentives, what targeted incentives do you believe are needed for the future?

Virmani: There are general elements which apply to everyone, ease of doing business, basic infrastructure, skilling, etc. Skilling is always very important. What is special about medium industries is that they contribute a large part of the exports. So, in a sense, they are closer to the frontier. They have to compete in terms of quality and cost in international markets. Secondly, they also play an important role in supply chains. We’ve been talking a lot about supply chains recently, in the context of mobile phones, for example. Medium industries are important for both purposes: for backward integration of supply chains and for export competitiveness.

Let me give you an example. In textiles, a simple skill like stitching varies depending on the material. The stitching skills required for cotton may be very different from those needed for leather, and different again for mixed fabrics. Many variants of fabric are used and exported. So, there’s a need to identify and meet these skilling requirements. It’s not about high-end skills, but medium-level skills, the practical, hands-on skills that these industries need to export and supply high-quality goods.

So, there are elements that may be common across industries, but we need a focused and differentiated approach for medium industries.

Q: Shifting focus to current economic issues, particularly the sharp fall in FDI in FY25. FDI has dropped to a record low of $353 million. Why do you think this happened, and what’s your outlook for the months ahead?

Virmani: When we look at FDI inflows, we have gross and net FDI. What has fallen is not the gross FDI, that fell only slightly and is now almost back to its earlier peak, but the net FDI inflows, which have reduced quite substantially.

If we subtract gross from net, there are two elements which have increased actually on the negative side: one is retained earnings remitted back by foreign-invested enterprises, and the second is disinvestment. Preliminary analysis shows that one important factor was the collateral effect of removing the Dividend Distribution Tax (DDT). Earlier, companies had to pay tax on dividends. When DDT was abolished, it created an opportunity for foreign companies to remit retained earnings they had held in India. So that’s a temporary phenomenon.

There were also other contributing factors. For example, the strong growth of the US economy in previous years, higher equity returns, and foreign exchange appreciation may have encouraged foreign companies to remit earnings.

Another speculative, but plausible factor is diversification, some companies may have used Indian funds to expand into Southeast Asia, such as Vietnam, where industries like footwear are growing. Since Indian stock markets are strong, it was easier for them to sell and fund such diversification.

In my judgment, most of these are temporary factors, and we should see a return to more normal net FDI inflows over the next few years. That said, we must still aim to increase gross FDI significantly and not rest on our previous peaks.

Q: The Prime Minister recently said that we need an investment-friendly charter. Given the record low in FDI, what should the focus be for FY26 if we want to make India a more attractive destination?

Virmani: NITI has been working on an index of investment attractiveness. India has 28 states, and some attract more FDI in manufacturing than others. Our aim is to help lagging states attract more FDI. On the Prime Minister’s directive, we’ve created an index, now in phase two, that should be completed in the next few months. It will show how attractive each state is for manufacturing investment, including FDI.

More importantly, the index’s subcomponents will help states identify areas where they’re lagging. At NITI, we don’t direct states but promote competitive and cooperative federalism. These indices help states that want to improve see where they need to act.

Other issues vary by state, skilling, for instance. I’ve visited several states to understand these differences. When we make a scheme, we make it for all states, but it’s important to drill down. States must also improve legacy industrial estates within urban areas, many of which are outdated.

So yes, general policies like infrastructure development are important, but each state must assess its specific challenges. At NITI, we try to assist states in identifying, correcting, and reforming these issues.

Watch accompanying video for entire conversation.

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