The rapid expansion of the digital economy has significantly transformed the operational landscape of Micro, Small, and Medium Enterprises (MSMEs) in India. MSMEs contribute nearly 30% to India’s GDP in FY 2024–25 and account for exports worth approximately ₹12.39 lakh crore, making them a vital pillar of the economy. Increased internet penetration, affordable smartphones, digital payment systems, and supportive government initiatives have accelerated digital adoption among MSMEs. This study analyses the impact of the digital economy on MSMEs using a descriptive and analytical approach based on secondary data from government reports, RBI publications, Ministry of MSME documents, industry surveys, and digital economy studies. Findings reveal widespread adoption of basic digital tools. Nearly 48% of MSMEs use UPI for business transactions, and over 73% report improved performance due to digital tools. Digitalization has enhanced operational efficiency, reduced transaction costs, improved financial transparency, expanded market access through e-commerce platforms, and strengthened fintech-enabled credit access, which exceeded ₹6.5 lakh crore in FY 2024–25. Despite these gains, structural challenges persist. Digital literacy gaps, limited awareness of government schemes, inadequate internet connectivity, cybersecurity risks, and financial constraints continue to restrict deeper digital integration, particularly among micro and rural enterprises. The study concludes that while the digital economy presents significant growth opportunities, inclusive and sustainable digital transformation requires coordinated policy efforts focused on digital skills, infrastructure development, cybersecurity preparedness, simplified regulations, and improved access to digital finance.