West Asia conflict to shear 100 bps off MSME revenue this fiscal

Headwinds stemming from the ongoing conflict in West Asia will hit micro, small and medium enterprises (MSMEs) in India hard this fiscal, impacting both revenue and profitability.

According to projections in Crisil Intelligence’s latest MSME Report, revenue growth will moderate to 7.5-8.5%, down 100 basis points (bps) compared with fiscal 2026, while earnings before interest, tax, depreciation and amortisation (Ebitda) margin will decline 50-100 bps to 5-5.5%.

The report, a twice-a-year publication that covers 69 sectors and 147 clusters representing aggregate revenue of Rs 75 trillion—approximately 20-25% of India's GDP and two-thirds of the MSME universe—paints a sobering picture.

The forecasts would have been more subdued but for the domestic gems and jewellery market, which is experiencing a value-led expansion, driven by a surge in gold prices.

Such outsized impact, however, is not unprecedented.

Amid the Covid-19 pandemic, large players had seen revenue decline by 0-1% in fiscals 2020 and 2021, while MSMEs experienced a 3-5% drop. The Ebitda margin of MSMEs had also declined 80 bps to 4.7% in fiscal 2021.

The West Asia crisis is following a similar pattern, with small businesses bearing a disproportionate burden. Only, MSMEs face a dual challenge this time round: first, production cuts and revenue losses due to reduced availability of raw material such as gas and, second, margin compression stemming from trade disruptions and limited pricing power to pass on increasing commodity and energy costs.

Based on impact, MSMEs can be classified into three buckets: those dependent on energy-related raw materials such as gas, those reliant on energy-linked derivatives, and those vulnerable to trade disruptions.

Units heavily reliant on energy inputs, particularly those in clusters with limited access to gas or lower ability to switch to alternative fuels, will be hit hardest.

The Morbi cluster, which accounts for over 80% of India’s ceramic tile production, is a case in point. With 80-85% of its production gas-based, MSMEs which generate over 85% of the cluster’s ceramic sector revenue will see revenue growth plummet from 9-11% in fiscal 2026 to 1-3% in fiscal 2027. This is largely due to export-oriented production (80-90% of output), with 20-25% of exports directed to the Middle East. Accordingly, their Ebitda margin is expected to decline 300-400 bps to 4-6% in fiscal 2027.

Similarly, Firozabad’s glass sector has seen a 40% production reduction, with MSMEs likely to experience only 1-3% revenue growth.

Next to be impacted are sectors that use energy-linked derivatives as raw material.

Says Pushan Sharma, Director, Crisil Intelligence, “The chemical sector, which imports more than 90% of its key inputs, such as methanol, from the Middle East, has seen raw material prices surge by 1.2–1.4 times with partial pass-on. Thus, chemical MSMEs in Vadodara are expected to witness a margin decline of 150–250 bps to 3-5% in fiscal 2027. Dyes and pigments MSMEs in Ahmedabad are facing a similar situation. The input costs have jumped 1.3-1.5 times, with only partial pass-through happening, squeezing margins by 150-250 bps on-year to 3-5% in fiscal 2027. In Surat’s textile sector, raw material costs, particularly for polyester yarn and fibre, which are crude derivatives, have surged, further squeezing already thin margins.”

Compared with the two categories above, MSMEs impacted by trade disruptions will experience a moderate impact.

Says Elizabeth Master, Associate Director, Crisil Intelligence, “Pharma MSMEs have been impacted by shortage of raw material such as active pharmaceutical ingredients (APIs). Prices of APIs have surged due to shortage of solvents and key starting materials in China, the main import destination of raw material for smaller firms. Thus, smaller firms could face a margin decline of 100-200 bps to 5-7% in fiscal 2027. Similarly, gems and jewellery MSMEs in Surat have high trade dependency, accounting for more than 80% of diamond exports, with over a quarter exported to the Middle East. In a sector that already operates on wafer-thin Ebitda margin of 2-3%, these MSMEs could see a further decline of 100-150 bps as buyers are seeking a 5-10% price cut amid subdued sentiment.”

Further, rising diesel prices are likely to impact MSMEs in sectors such as road construction, where fuel costs account for 8-10% of the total cost. We expect their margin to decline 50-100 bps to 8-10% in fiscal 2027.

Similarly, increasing packaging costs will pressure margins in packaged foods, where packaging accounts for 10-15% of overall cost. As a result, the margin of MSMEs in this sector are expected to decline 50-100 bps to 6-6.5% in fiscal 2027.

To mitigate the impact of the crisis, the Union Cabinet has approved a scheme with an outlay of Rs 181 billion, providing total credit support of Rs 2.55 trillion under the Emergency Credit Line Guarantee Scheme 5.0. This scheme, which proved vital during the pandemic, with about 95% of guarantees issued and 66% of the guaranteed amount directed toward MSMEs, is expected to benefit more than 11 million businesses, accounting for ~14% of registered MSMEs on the Udyam portal. However, its effectiveness in stabilising the MSME sector will depend on the quality, speed and inclusiveness of its implementation and execution mechanisms.