For MSMEs, Growth Often Depends on the Last Few Kilometres

As India prepares its Union Budget, debates on economic growth often revolve around manufacturing incentives, highways, ports, and large-scale infrastructure. Yet for a substantial share of India’s economy, productivity and competitiveness are shaped less by long-distance connectivity and more by what happens within city limits. For micro, small, and medium enterprises, the ability to move goods reliably across short urban distances frequently determines whether growth is feasible at all.

Recent empirical evidence highlights this reality with unusual clarity. A study conducted by  the Centre for Digital Economy Policy Research at the Indian Institute of Technology Delhi examined the impact of technology-enabled intra-city logistics services on MSMEs. Based on firm-level surveys and service provider usage data, the study found that 73 per cent of MSMEs reported lower transportation costs after adopting app-based goods transport. Ninety-five per cent experienced improved goods transport reliability, while 27  per cent expanded their market reach beyond earlier geographic constraints.¹

These are not incremental improvements. MSMEs contribute close to 30 percent of India’s gross domestic product and account for nearly 45 percent of manufacturing output.² Most operate with limited working capital, dispatch multiple small consignments each day, and depend on predictable turnaround times. For such enterprises, even small increases in logistics efficiency translate directly into higher margins, faster inventory cycles, and a greater willingness to accept new orders.

Technology-enabled intra-city logistics services address a long-standing coordination challenge in urban markets. By digitalization of fragmented demand and supply, these service providers reduce search and transaction costs, limit vehicle idle time, and improve price discovery for short-haul goods movement. In practical terms, they give MSMEs access to logistics capabilities that were previously available mainly to larger firms with dedicated fleets and long-term transport contracts.

Despite these gains, the model remains vulnerable to structural constraints. The same IIT Delhi study flags regulatory and tax ambiguities as a significant risk to scalability. App-based goods transport services are being  evaluated under different tax frameworks from that applicable to the traditional operators, despite having identical  operations.

In particular, uncertainty around Goods and Services Tax classification has emerged as a concern. Interpretation of recent amendments that treat digitally booked intra-city transport as local delivery services could raise the applicable GST rate from 5 percent to 18 percent. For MSMEs, an estimated 80 per cent of whom remain unregistered under GST and are therefore unable to avail input tax credit; that rely on frequent, low-value trips, such a shift would materially increase costs and discourage usage.¹

These frictions matter beyond the MSME segment. India has made progress in reducing overall logistics costs. A recent assessment by the Department for Promotion of Industry and Internal Trade and the National Council of Applied Economic Research estimates logistics costs at 7.97 percent of GDP in 2023 to 2024, down from earlier estimates exceeding 13 percent.³ Yet this aggregate improvement masks persistent inefficiencies in last-mile and intra-city movement, where congestion, regulatory overlap, and informal practices remain concentrated.

If India’s Stated ambition is to reduce logistics costs further towards global benchmarks, intra-city goods movement cannot remain a policy afterthought. Urban logistics functions as economic infrastructure for small businesses, shaping productivity, employment, and the viability of local markets.

The forthcoming Union Budget provides an opportunity to respond with specificity rather than scale. A uniform  regulatory and tax framework for traditional and technology-enabled goods transport services would better reflect their high-frequency, low-margin nature. Clear GST guidance could reduce compliance uncertainty for both service providers and MSMEs. Incentives for gradual formalisation, anchored in digital public infrastructure, would encourage participation without imposing abrupt cost shocks on small operators.

Equally important is the design of competition and innovation policy. App-based goods transportation service providers  derive long-term value from trust, transparency, and predictability rather than exclusivity. Policies that promote interoperability, data transparency, and fair market access can strengthen these attributes while preserving room for experimentation. For MSMEs, such safeguards translate into confidence that the market will remain accessible and reliable over time.

Intra-city logistics rarely features prominently in fiscal speeches, yet its economic impact is felt daily across urban India. For small businesses, the distance between stagnation and growth is often measured in kilometres, minutes, and rupees per trip. Budgetary attention to this domain would therefore not be symbolic. It would be directly productive. If MSME-led growth is to remain central to India’s economic strategy, the movement of goods within cities deserves a more deliberate place in fiscal and regulatory thinking. The evidence already points in that direction. The Budget should follow.

Associate Professor of Marketing at ISB

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