West Asia Crisis to Hit Indian MSMEs Harder Than Large Firms, Says Crisil

India's micro, small and medium enterprises (MSMEs) are likely to face a significantly larger impact from the ongoing West Asia conflict than larger companies, according to a new report by Crisil Intelligence.

The ratings and analytics firm estimates that the geopolitical turmoil will reduce MSME revenue growth by 100 basis points during the current fiscal year, while also putting pressure on profitability.

The report argues that the burden on small businesses could be comparable to, and in some cases exceed, the stress experienced during the COVID-19 pandemic.

Why are MSMEs more vulnerable than large companies?

According to Crisil, Indian MSMEs are confronting two major challenges simultaneously.

The report said they are facing "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."

Unlike large corporations, many MSMEs have limited bargaining power and fewer options to absorb or transfer higher costs to customers. This makes them more exposed to supply disruptions and rising input expenses.

How does the current situation compare with the COVID-19 period?

Crisil drew parallels with the pandemic period to highlight the vulnerability of smaller businesses.

"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," Crisil said.

The comparison suggests that MSMEs continue to remain more sensitive to external shocks than larger enterprises.

What is the outlook for MSME revenue and profitability?

According to Crisil Intelligence's latest MSME Report, growth is expected to moderate in fiscal 2027.

The report stated that "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%."

However, the outlook would have been weaker if not for strength in the domestic jewellery market.

As per the report, "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."

Which sectors are likely to be hit the hardest?

Crisil believes businesses that rely heavily on energy inputs will face the most severe consequences.

The report noted that "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."

A key example is Gujarat's Morbi ceramic cluster, which accounts for more than 80 per cent of India's ceramic tile production.

"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."

The combination of energy dependence and export exposure makes the cluster particularly vulnerable to disruptions linked to the West Asia conflict.

How will rising fuel prices affect construction-related MSMEs?

The report also highlighted risks for road construction businesses.

The increasing diesel prices will likely "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," Crisil said.

Since fuel is a major component of project costs, sustained increases in diesel prices could significantly erode profitability.

What challenges do packaged food companies face?

Packaged food manufacturers are also expected to face margin pressure due to rising packaging expenses.

According to Crisil, "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."

This means businesses may have to absorb higher costs or risk losing customers if they attempt to raise prices.

What is the broader takeaway?

Crisil's analysis suggests that a prolonged West Asia crisis could become a major challenge for India's MSME sector. Rising energy costs, supply-chain disruptions, export uncertainties and weak pricing power are expected to weigh on growth and profitability. Energy-intensive industries, export-focused clusters and businesses dependent on fuel and packaging materials appear most at risk, while strong demand in the gems and jewellery segment may offer some support to the broader MSME landscape.

(With inputs from ANI)