India's cash-strapped micro, small and medium enterprises (MSMEs) are likely to face slower revenue growth and shrinking profitability this fiscal year as the ongoing conflict in West Asia disrupts supply chains, raises energy-linked input costs and affects exports. The pressure comes at a time when many small businesses continue to grapple with working-capital constraints and delayed payments.
According to a Crisil Intelligence report, revenue growth for MSMEs is projected to moderate to 7.5-8.5 per cent in fiscal 2027, down by 100 basis points from the previous fiscal year, while earnings before interest, tax, depreciation and amortisation (Ebitda) margins are expected to contract by 50-100 basis points to 5-5.5 per cent, the report said.
The report covers 69 sectors and 147 industrial clusters with aggregate revenue of about Rs 75 trillion, representing roughly 20-25 per cent of India's gross domestic product and nearly two-thirds of the country's MSME universe. According to Crisil Intelligence, the impact of the conflict is expected to be uneven, with businesses dependent on gas, energy-linked derivatives and export trade facing the greatest pressure.
"The West Asia crisis is following a similar pattern, with small businesses bearing a disproportionate burden," the report said, noting that MSMEs are facing both production disruptions from reduced availability of raw materials and margin pressure from higher commodity and energy costs.
For many MSMEs, the challenge extends beyond profitability. Smaller manufacturers typically rely on short-term bank credit to fund inventory and production before buyer payments are realised. As input costs rise and export demand weakens, the need for working-capital funding is likely to increase, potentially putting further pressure on already stretched balance sheets.
Additionally, India's delayed payment crisis continues to weigh on MSMEs despite policy reforms, with overdue receivables still exceeding Rs 7 lakh crore and accounting for more than 4.6 per cent of the country's gross value added, according to a report by Game, FISME and C2FO. The report said the large volume of cash locked in unpaid invoices continues to constrain working capital, limit access to formal credit and hamper expansion plans for millions of MSMEs that form a critical part of India's manufacturing and supply-chain ecosystem.
Industrial Clusters Face Sharpest Pain
The Morbi ceramic cluster in Gujarat, which accounts for more than 80 per cent of India's ceramic tile production, is expected to be among the hardest hit. Crisil Intelligence said revenue growth for MSMEs in the cluster could slow to 1-3 per cent in fiscal 2027 from 9-11 per cent in fiscal 2026.
The cluster relies heavily on natural gas, with 80-85 per cent of production gas-based, while 80-90 per cent of output is export-oriented. Around one-fifth to one-quarter of exports are shipped to the Middle East. As a result, Ebitda margins for ceramic MSMEs in Morbi are expected to decline by 300-400 basis points to 4-6 per cent this fiscal, the report said.
CareEdge Ratings, in a report, also said that export-oriented and supply chain-linked MSMEs are becoming increasingly exposed to global demand fluctuations and geopolitical disruptions because of their growing dependence on bank funding, particularly for working capital requirements.
The report said the Middle East conflict has created a “fresh layer of uncertainty” for MSME credit, tightening working-capital conditions for firms linked to international trade. MSME credit outstanding has crossed Rs 35 lakh crore, registering a CAGR of 15.1 per cent.
CareEdge noted that MSME asset quality has improved steadily in recent years, with gross non-performing asset (GNPA) ratios declining from 11 per cent in FY20 to 3.3 per cent by September 2025. Recoveries, upgrades and moderation in fresh slippages drove the improvement.
However, the report cautioned that the pace of improvement has slowed, suggesting limited room for further sharp declines in bad loans. It added that MSME lending continues to remain largely priority-sector driven, with around 80-90 per cent of public sector banks’ MSME exposure and 70-85 per cent of private sector banks’ exposure classified under priority-sector norms.
Interesting, Crisil said that in Uttar Pradesh's Firozabad glass manufacturing hub, production has already been reduced by about 40 per cent, with MSMEs expected to record revenue growth of only 1-3 per cent. Businesses that depend on energy-linked derivatives are also facing significant challenges.
"The chemical sector, which imports more than 90 per cent 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," Pushan Sharma, Director at Crisil Intelligence, said in the report.
Chemical MSMEs in Vadodara are expected to see margins fall by 150-250 basis points to 3-5 per cent in fiscal 2027. Similar pressure is being felt by dyes and pigments manufacturers in Ahmedabad, where input costs have increased by 1.3-1.5 times, resulting in margin compression of 150-250 basis points.
In Surat's textile industry, rising costs of polyester yarn and fibre, both derived from crude oil, are also expected to erode already thin margins. Trade-related disruptions are expected to have a relatively moderate impact, though some sectors remain vulnerable.
Pharmaceutical MSMEs are facing shortages of active pharmaceutical ingredients and other raw materials, leading to higher input costs, according to Crisil Intelligence. Meanwhile, Surat's gems and jewellery MSMEs, which account for more than 80 per cent of India's diamond exports, could see margins decline by 100-150 basis points. More than a quarter of their exports are directed to the Middle East, while overseas buyers are reportedly seeking price reductions of 5-10 per cent amid subdued demand.
New Credit Window Opens Amid Crisis
To provide targeted financial relief to airlines and MSMEs, the government has approved the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, aimed at facilitating an additional credit flow of Rs 2.55 lakh crore, with Rs 5,000 crore specifically earmarked for the aviation sector.
Under ECLGS 5.0, the government will provide 100 per cent credit guarantee coverage for MSMEs and 90 per cent for non-MSMEs, including airlines, through the National Credit Guarantee Trustee Company Limited (NCGTC). This is expected to encourage lending institutions to extend additional credit to stressed borrowers.
Civil Aviation Minister Ram Mohan Naidu said the move would help airlines navigate liquidity challenges while sustaining operations and safeguarding jobs. He added that the scheme would strengthen the resilience of India’s aviation ecosystem amid volatile global conditions.
Notably, banks have sanctioned more than Rs 35,000 crore in loans under the ECLGS 5.0. Lenders have approved around 80,000 applications involving loans worth Rs 35,194 crore, while guarantees amounting to Rs 15,720 crore have been issued as of 29 May, said Manoj Muttathil Ayyappan, Joint Secretary, Department of Financial Services.
Addressing reporters, Ayyappan said the response to the scheme has been encouraging and that borrowers can complete the fully digital application process within five to seven days. He said the scheme has been designed to ensure wider participation, with only borrowers classified as Special Mention Account (SMA)-2 as of March 31, 2026, remaining outside its ambit.
While talking to BW Businessworld, experts earlier cautioned that while emergency credit support can provide temporary relief, it may not fully offset the impact of persistent geopolitical uncertainty. If disruptions to energy supplies, trade routes and export demand continue, MSMEs in manufacturing clusters could face a prolonged squeeze on both growth and profitability, potentially delaying investment and expansion plans.
Read Here: Experts Back MSME-focused ECLGS Expansion But Warn Stress Risks Persist
Notably, Crisil Intelligence said the programme, which supported businesses during the Covid-19 pandemic, could benefit more than 11 million enterprises. However, its success in stabilising the sector will depend on how effectively and quickly the support is implemented. |
