The integration of Artificial Intelligence (AI) into business operations is rapidly transforming the global industrial landscape, and Indian Micro, Small, and Medium Enterprises (MSMEs) are gradually embracing this shift. This paper explores the current state of AI adoption among Indian MSMEs, highlighting its potential to enhance productivity, improve customer engagement, streamline supply chains, and foster innovation. Despite the recognized benefits, the adoption of AI remains limited due to challenges such as high implementation costs, a lack of skilled workforce, limited digital infrastructure, data privacy concerns, and low awareness among small business owners. The paper examines these barriers in the Indian context, supported by empirical data and case studies. Furthermore, it outlines prospects for AI adoption, emphasizing the role of government initiatives, affordable AI solutions, public-private partnerships, and capacity-building programs. The study concludes that while AI adoption among Indian MSMEs is at a nascent stage, targeted support mechanisms and policy reforms could accelerate digital transformation and contribute significantly to India’s economic growth and global competitiveness.