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What is the story about?
Headwinds stemming from the ongoing conflict in West Asia will hit micro, small and medium enterprises (MSMEs) in India hard this fiscal year, impacting both revenue and profitability, with clusters such as Morbi, Firozabad, Surat and Vadodara expected to be among the worst affected, Crisil said on Tuesday.
According to projections in Crisil Intelligence's latest MSME Report, revenue growth will moderate to 7.5-8.5%, down 100 basis points (bps) from FY26, while earnings before interest, tax, depreciation and amortisation (EBITDA) margins will decline by 50-100 bps to 5-5.5%.
The report, a twice-yearly publication covering 69 sectors and 147 clusters representing aggregate revenue of ₹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 weaker were it not for the domestic gems and jewellery market, which is experiencing value-led expansion driven by a surge in gold prices, Crisil said.
However, the ratings agency noted that such an impact is not unprecedented.
During the Covid-19 pandemic, large companies saw revenue decline by up to 1% in FY20 and FY21, while MSMEs experienced a 3-5% drop. EBITDA margins for MSMEs also declined by 80 bps to 4.7% in FY21.
The West Asia crisis is following a similar pattern, with small businesses bearing a disproportionate burden, Crisil said.
However, MSMEs face a dual challenge this time. First, production cuts and revenue losses due to reduced availability of raw materials such as gas. Second, margin compression resulting from trade disruptions and limited pricing power to pass on higher commodity and energy costs.
Based on the impact, MSMEs can be classified into three categories: those dependent on energy-related raw materials such as gas, those reliant on energy-linked derivatives, and those vulnerable to trade disruptions.
Units heavily dependent on energy inputs, particularly those in clusters with limited access to gas or lower ability to switch to alternative fuels, will be hit the hardest, according to Crisil.
The Morbi cluster, which accounts for over 80% of India’s ceramic tile production, is a case in point. With 80-85% of production dependent on gas, MSMEs, which contribute more than 85% of the cluster’s ceramic sector revenue, are expected to see revenue growth fall from 9-11% in FY26 to just 1-3% in FY27.
This is largely due to the cluster’s export-oriented production, with 80-90% of output exported and 20-25% of exports directed to the Middle East.
Accordingly, EBITDA margins are expected to decline by 300-400 bps to 4-6% in FY27.
Similarly, Firozabad’s glass sector has witnessed a 40% reduction in production, with MSMEs likely to report revenue growth of only 1-3%.
The next most affected segments are those that use energy-linked derivatives as raw materials.
Pushan Sharma, Director, Crisil Intelligence, said: "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 only a partial pass-through. Thus, chemical MSMEs in Vadodara are expected to witness a margin decline of 150-250 bps to 3-5% in fiscal 2027."
Further, rising diesel prices are likely to affect MSMEs in sectors such as road construction, where fuel costs account for 8-10% of total costs. Crisil expects margins in the sector to decline by 50-100 bps to 8-10% in FY27.
Similarly, higher packaging costs are expected to weigh on packaged food companies, where packaging accounts for 10-15% of overall costs. As a result, margins for MSMEs in this sector are projected to decline by 50-100 bps to 6-6.5% in FY27, Crisil added.
According to projections in Crisil Intelligence's latest MSME Report, revenue growth will moderate to 7.5-8.5%, down 100 basis points (bps) from FY26, while earnings before interest, tax, depreciation and amortisation (EBITDA) margins will decline by 50-100 bps to 5-5.5%.
The report, a twice-yearly publication covering 69 sectors and 147 clusters representing aggregate revenue of ₹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 weaker were it not for the domestic gems and jewellery market, which is experiencing value-led expansion driven by a surge in gold prices, Crisil said.
However, the ratings agency noted that such an impact is not unprecedented.
During the Covid-19 pandemic, large companies saw revenue decline by up to 1% in FY20 and FY21, while MSMEs experienced a 3-5% drop. EBITDA margins for MSMEs also declined by 80 bps to 4.7% in FY21.
The West Asia crisis is following a similar pattern, with small businesses bearing a disproportionate burden, Crisil said.
However, MSMEs face a dual challenge this time. First, production cuts and revenue losses due to reduced availability of raw materials such as gas. Second, margin compression resulting from trade disruptions and limited pricing power to pass on higher commodity and energy costs.
Based on the impact, MSMEs can be classified into three categories: those dependent on energy-related raw materials such as gas, those reliant on energy-linked derivatives, and those vulnerable to trade disruptions.
Units heavily dependent on energy inputs, particularly those in clusters with limited access to gas or lower ability to switch to alternative fuels, will be hit the hardest, according to Crisil.
The Morbi cluster, which accounts for over 80% of India’s ceramic tile production, is a case in point. With 80-85% of production dependent on gas, MSMEs, which contribute more than 85% of the cluster’s ceramic sector revenue, are expected to see revenue growth fall from 9-11% in FY26 to just 1-3% in FY27.
This is largely due to the cluster’s export-oriented production, with 80-90% of output exported and 20-25% of exports directed to the Middle East.
Accordingly, EBITDA margins are expected to decline by 300-400 bps to 4-6% in FY27.
Similarly, Firozabad’s glass sector has witnessed a 40% reduction in production, with MSMEs likely to report revenue growth of only 1-3%.
The next most affected segments are those that use energy-linked derivatives as raw materials.
Pushan Sharma, Director, Crisil Intelligence, said: "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 only a partial pass-through. Thus, chemical MSMEs in Vadodara are expected to witness a margin decline of 150-250 bps to 3-5% in fiscal 2027."
Further, rising diesel prices are likely to affect MSMEs in sectors such as road construction, where fuel costs account for 8-10% of total costs. Crisil expects margins in the sector to decline by 50-100 bps to 8-10% in FY27.
Similarly, higher packaging costs are expected to weigh on packaged food companies, where packaging accounts for 10-15% of overall costs. As a result, margins for MSMEs in this sector are projected to decline by 50-100 bps to 6-6.5% in FY27, Crisil added.
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