A polycrystalline 1.5% Ho: YAG fiber with a diameter of 31 µm was prepared. Surface roughness from grain boundary grooving was reduced by polishing, which decreased the fiber scattering coefficient from 76 m<sup>-1</sup> to 35 m<sup>-1</sup>. Lasing tests were done on this fiber with a SF57 Schott glass cladding. Lasing was confirmed by spectrum narrowing with threshold pump power lower than 500 mW and a slope efficiency of 7%. To our knowledge, this is the first lasing demonstration from a small diameter polycrystalline ceramic fiber.