EU's CBAM poses major compliance challenge for Indian MSMEs; Experts seek urgent government support

New Delhi: Indian Micro, Small, and Medium Enterprises (MSMEs) face severe compliance challenges under the European Union's Carbon Border Adjustment Mechanism (CBAM), prompting industry experts to call for immediate state intervention, technology transfer, and alternate export supply chains.

R. R. Rashmi, Distinguished Fellow at The Energy and Resources Institute (TERI), talking to the media on the sidelines of PHDCCI's Carbon Shift India 2026 conference, stated that while large-scale industries possess some technical resilience, smaller units lack both the financial capacity and the reporting framework required by European regulations.

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"The large industries, like iron and steel or aluminum, do have some financial and technical capacity," Rashmi said. "It's not that they are completely ready--it is an additional cost for them too--but they do have the capacity. The biggest concern is for our small units, the MSMEs. They have neither the capacity nor the resources."

He noted that the EU's tax on the carbon content of carbon-intensive goods imported into their region threatens the export competitiveness of domestic steel and aluminium sectors, demanding urgent structural adjustments within India's manufacturing ecosystem.

To protect domestic interests, Rashmi suggested implementing an internal data collection system to monitor and measure carbon intensity, alongside converting existing indirect domestic levies into an explicit carbon tax to keep funds within the country.

"Apart from the suggestions I just gave for resources, there is a critical need for capacity building, and for that, we should make a fund at the national level so that we can support these small units," Rashmi added. He also advocated for a mutual recognition regime between European verification agencies and the Export Inspection Council of India to prevent expensive foreign auditing costs.

The lack of equity in the global carbon accounting framework emerged as a primary grievance for the manufacturing sector. The current rules create an uneven landscape for developing economies that operate under different baseline targets.

Ravinder Bhan, Senior Director at the Indian Steel Association, stated that CBAM functions as a tax set up by the European Union Commission to upgrade their own industries and technology. He noted that if Indian exports of steel or aluminium do not meet European emission targets, the tax applies disproportionately.

"What about small and medium sized companies? They will be in trouble because they have to hire an auditor who will accredit the European Union. Till now, they have not allowed accreditation. So, they have to take the certificate. It is a costly thing. They have to audit and upgrade the system but it is a costly affair. They will not be able to afford it," Bhan explained.

Jatinder Singh, Deputy Secretary General, PHDCCI, focused on how MSMEs can overcome these challenges through government-backed monitoring technologies to track carbon footprints directly at the manufacturing source.

He observed that while heavy industries have set Net Zero targets, these do not match EU benchmarks, leading to lower steel and aluminium exports over the last few months.

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"Therefore, we should reorient toward other sectors, such as Africa and similar regions. For this reorientation, our industry, with the support of the Government of India, is highly capable," Singh stated.

He added that companies are actively seeking alternative supply chains and new destination countries, which will soon mitigate the initial export shocks felt by the sector.