ISAS Briefs

Summary

Artificial Intelligence (AI) adoption is growing amongst small and medium-sized enterprises in India, driven by interest, optimism of the potentials of AI, and demands to innovate. However, challenges exist in furthering that adoption.

Small and medium-sized enterprises (SMEs) across India are increasingly exploring and using artificial intelligence (AI) to enhance productivity, automate operations and remain competitive. While adoption levels vary across countries and sectors, the overall trend reflects growing experimentation, government support and ecosystem-building. What is driving this shift? What challenges persist? And what are the implications for India’s technology governance?

Several key drivers are accelerating AI adoption among SMEs. First, government initiatives are playing a catalytic role. Many Asian governments, including Singapore, Malaysia and South Korea, are offering grants, training programmes and digital infrastructure to lower the barriers for AI adoption. Second, digital transformation pressures have intensified in the post-pandemic era, pushing SMEs to adopt AI in customer service (such as chatbots), inventory management, predictive analytics and marketing. Third, the rise of cloud-based and AI-as-a-service platforms has expanded access. Affordable, scalable tools from companies like Microsoft, Google and local providers are making AI more accessible to SMEs with limited in-house technical capacity.

However, regional variations do persist. Singapore and South Korea lead in SME AI adoption due to robust digital infrastructure, proactive policy frameworks and AI-focused grants. India and Indonesia are witnessing rapid growth in AI experimentation among startups and mid-sized firms, though significant gaps remain between urban and rural enterprises. Meanwhile, countries like Malaysia, Vietnam and Thailand are building emerging ecosystems through pilot programmes and capacity-building efforts. Multilateral platforms such as the Association of Southeast Asian Nations, Asia-Pacific Economic Cooperation and the Quadrilateral Security Dialogue are also playing a growing role in enabling AI development, deployment and regulation. These mechanisms promote SME AI adoption through ethical frameworks, technical assistance and regulatory alignment, fostering a more trusted and interoperable digital environment.

In India, AI adoption among SMEs remains modest – currently at 15 per cent – with awareness and perceived value significantly outpacing actual uptake. Key barriers include high implementation costs, skills shortages, and a lack of effective, easy-to-use tools. Nonetheless, interest is growing, particularly in generative AI (GenAI) and e-commerce use cases. Indian SMEs are increasingly leveraging AI for consumer analytics, demand forecasting and inventory optimisation. Sustained growth will require targeted incentives, affordable AI models and capacity-building initiatives tailored to India’s diverse business landscape. There is an expectation that using AI models will improve decision-making within firms since it enables real-time data analysis. AI tools could also be used to better track product development and management, which could increase market share over time. GenAI tools can also help SMEs manage complex tasks like content creation and design without having to outsource those tasks. Sectors like retail, agriculture, healthcare and financial technology show particular promise given the challenges and opportunities.

New Delhi has been actively supporting broader AI adoption. The IndiaAI Mission, a public–private partnership, aims to drive innovation across sectors. Backed by a US$1.2 billion (S$1.54 billion) budget over five years, the mission will fund AI infrastructure, foundational models and compute access, including the provision of over 18,700 graphics processing units. New Delhi has also selected homegrown models, such as Sarvam AI, Gan AI, Gnan AI and Soket AI, to develop India-origin large language models that prioritise regional language coverage and affordability. Additionally, the IndiaAI Startups Global Initiative connects startups with international accelerators to enhance global integration and scaling opportunities. The Ministry of Electronics and Information Technology has also launched a National Program on Artificial Intelligence to integrate AI centres, skilling pathways, data infrastructure and responsible AI frameworks – fostering systemic adoption across sectors.

There is growing momentum among Indian firms to adopt AI. Approximately 65 per cent of firms are investing in and experimenting with GenAI tools, although only 25 per cent have effectively integrated these technologies into workplace processes. In the dynamic e-commerce sector, SMEs are using AI for consumer insights, forecasting, and logistics – with early efficiency gains already evident. Experts estimate that AI could add up to US$500 billion (S$640 billion) to India’s gross domestic product by 2035 – but only if adoption spreads beyond urban centres to secondary cities and underserved regions.

Several challenges could constrain deeper AI adoption in India. First, a lack of technical expertise limits the ability of many SMEs to implement and manage AI solutions. Second, cost concerns – especially in the initial stages – remain a significant barrier. Third, institutional inertia and entrenched business practices slow innovation, particularly among firms with limited awareness of AI’s potential to impact their bottom line. Finally, a widespread lack of high-quality, structured data hampers the development and deployment of relevant AI models across Asia’s SME sector.

AI adoption among SMEs in India is gaining momentum. Adoption is strongest in digitally advanced sectors and industries undergoing rapid digital transformation with clear business use cases. However, scaling this momentum will require sustained public-private collaboration, regulatory clarity and SME-specific capacity-building efforts to overcome structural and technical hurdles.

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Dr Karthik Nachiappan is a Research Fellow at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore (NUS). He can be contacted at isaskn@nus.edu.sg. The author bears full responsibility for the facts cited and opinions expressed in this paper.

Pic credit: ISAS-NUS