West Asia crisis to dent MSME growth, squeeze margins in FY27: Crisil

India's micro, small and medium enterprises (MSMEs) are expected to face significant pressure in FY27 as the ongoing conflict in West Asia disrupts supply chains, raises input costs, and affects exports, leading to slower revenue growth and weaker profitability, according to a report by Crisil Intelligence. 

The report projects MSME revenue growth to moderate to 7.5-8.5% in fiscal 2027, down by around 100 basis points from FY26. Earnings before interest, tax, depreciation and amortisation (EBITDA) margins are expected to decline by 50-100 basis points to 5-5.5%. 

Crisil's biannual MSME Report covers 69 sectors and 147 clusters with aggregate revenue of about ₹75 lakh crore, representing roughly 20-25% of India's GDP and nearly two-thirds of the MSME universe. 

The rating agency said the impact would have been more severe had it not been for the domestic gems and jewellery market, which is witnessing value-led growth due to a sharp rise in gold prices. 

Drawing parallels with the Covid-19 pandemic, Crisil noted that MSMEs had experienced a steeper revenue decline than larger companies during fiscals 2020 and 2021. The current crisis is following a similar pattern, with smaller businesses bearing a disproportionate share of the burden. 

Unlike during the pandemic, however, MSMEs now face a dual challenge: production disruptions due to shortages of critical raw materials such as natural gas and margin pressure arising from rising commodity and energy costs that many smaller firms struggle to pass on to customers. 

Energy-dependent sectors to face the sharpest impact 

Crisil classified affected MSMEs into three broad categories — those dependent on energy-related raw materials, those reliant on energy-linked derivatives and those vulnerable to trade disruptions. 

The most severely impacted are businesses heavily dependent on energy inputs, particularly clusters with limited fuel alternatives. 

The Morbi ceramic cluster in Gujarat, which accounts for more than 80% of India's ceramic tile production, is among the hardest hit. Around 80-85% of production in the cluster is gas-based while MSMEs contribute over 85% of sector revenue. 

Revenue growth in the cluster is expected to plunge to 1-3% in fiscal 2027 from 9-11% in fiscal 2026, largely due to its export orientation, with 20-25% of shipments destined for the Middle East. As a result, EBITDA margins are projected to shrink by 300-400 basis points to 4-6% during the year. 

Similarly, the glass manufacturing cluster in Firozabad has witnessed a 40% reduction in production, with MSMEs expected to record only 1-3% revenue growth. 

Chemical, textile MSMEs face input cost pressure 

The second category comprises businesses dependent on energy-linked derivatives as key raw materials. "The chemical sector, which imports more than 90% of critical inputs such as methanol from the Middle East, has witnessed raw material prices rise by 1.2-1.4 times, with only partial pass-through to customers," said Pushan Sharma, Director, Crisil Intelligence. 

Consequently, chemical MSMEs in Vadodara are expected to see EBITDA margins decline by 150-250 basis points to 3-5% in fiscal 2027. 

Dyes and pigments manufacturers in Ahmedabad face a similar situation, with input costs rising 1.3-1.5 times and limited pricing power leading to margin compression of 150-250 basis points to 3-5%. 

In Surat's textile industry, rising prices of polyester yarn and fibre, both crude-oil derivatives, are further straining already thin margins. 

Trade disruptions to affect pharma, gems, and jewellery 

MSMEs exposed to trade disruptions are expected to face a relatively moderate impact compared with energy-intensive sectors. "Pharmaceutical MSMEs have been affected by shortages of active pharmaceutical ingredients (APIs), as solvent and key starting material supplies from China remain constrained," said Elizabeth Master, Associate Director, Crisil Intelligence. 

As a result, smaller pharmaceutical companies could witness margin erosion of 100-200 basis points, taking EBITDA margins down to 5-7% in fiscal 2027. 

Gems and jewellery MSMEs in Surat, which account for over 80% of India's diamond exports and have significant exposure to Middle Eastern markets, are also under pressure. 

Operating in a sector where EBITDA margins are already as low as 2-3%, these firms could see margins decline by another 100-150 basis points as buyers seek price reductions of 5-10% amid weak sentiment. 

Rising fuel, packaging costs add to pressure 

The report also highlighted the indirect impact of rising fuel and logistics costs. Road construction MSMEs, where diesel accounts for 8-10% of total project costs, are expected to see margins decline by 50-100 basis points to 8-10% in fiscal 2027. 

Similarly, packaged food manufacturers may face margin pressure as higher packaging costs — which account for 10-15% of total expenses — are expected to reduce margins by 50-100 basis points to 6-6.5%. 

Government support may provide relief 

To cushion the impact on smaller businesses, the Union Cabinet has approved a scheme with an outlay of ₹18,100 crore, providing total credit support of ₹2.55 lakh crore under the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0. The scheme is expected to benefit more than 11 million businesses, representing around 14% of MSMEs registered on the Udyam portal. 

Crisil noted that while the programme could provide crucial liquidity support, its success in stabilising the sector will depend on the speed, quality and inclusiveness of implementation.