Iran-Israel war: Challenges mount for textiles, auto parts, handicraft MSMEs

New Delhi: India's micro, small, and medium enterprises or MSMEs, already grappling with challenges, could face additional strain as the Iran-Israel conflict intensifies, experts warn.

MSMEs form a critical part of India’s global trade network, contributing to a wide range of sectors such as textiles, handicrafts, and automotive components.

The growing instability in West Asia, particularly around key transit routes such as the Strait of Hormuz and the Chabahar port, may disrupt supply chains and drive up freight costs, adding pressure on MSME exporters.

According to government data, MSMEs contribute about 45% to India's total exports.

“The ongoing Iran-Israel conflict poses significant risks to the automotive sector, particularly concerning raw materials and components sourced from the Middle East,” Veer Singh, CEO of Lord's Automative, told Mint. "As many financial institutions are intricately linked to this region, disruptions could lead to funding shortages for numerous startups reliant on Middle Eastern investments."

“This stagnation in financial flow could hinder growth, reduce revenue prospects, and increase operational expenses for new ventures in the automotive industry,” he said, adding that as geopolitical tensions rise, supply chain vulnerabilities may become more pronounced, impacting production timelines and costs.

As per the Economic Survey 2024, MSMEs contribute 30% to India's GDP and employ 11 crore people, with 35.4% of the country’s manufacturing output coming from this sector.

The survey reveals that gross value added (GVA) per worker increased from $1,652.56 to $1,695.15, while the gross value of output (GVO) per establishment rose from $4,762.58 to $5,540.81, indicating enhanced productivity and labour efficiency.

“Our trade with Europe and Russia would suffer badly, and key air routes could be disrupted, significantly impacting exports of textiles, electronic goods, gems and jewellery, pharmaceuticals, and agricultural products,” said Ram Singh, professor of International Business at the Indian Institute of Foreign Trade and Head of the Centre for Distance and Online Education (CDOE), IIFT.

Cancelled bookings

Bookings confirmed in August and September are now being cancelled, said a Gurugram-based textiles exporter who spoke about the condition of anonymity. "The export of textile products to Iran and other Middle Eastern countries was primarily conducted through Turkey, and due to the ongoing disturbances, the textiles trade is heavily impacted," the person said.

Textile exports decreased by 3.23% to $34.40 billion in FY24, down from $35.55 billion in FY23. In FY22, textile exports were valued at $41.12 billion.

“When all the big players are under stress, the MSME sector is no exception. We are currently assessing the damage the industry will face from the disturbances in West Asia,” said Engineering Exports Promotion Council chairman Arun Kumar Garodia.

Also Read: India braces for economic strain as West Asia conflict escalates

Mukesh Mohan Gupta, president of the Chamber of Indian Micro, Small, and Medium Enterprises said, “The disturbances will definitely affect the MSME units. Overall, there will be an impact if tensions escalate to the next level.”

Under such circumstances, freight prices will rise, and shipment insurance costs will increase, significantly affecting the MSME sector, he said.

“Even if some MSME units are not directly engaged in exporting specific goods and supply, the stress experienced by these larger companies will inevitably be passed down to smaller and medium manufacturing units,” Gupta explained.

Queries emailed to the commerce ministry remained unanswered till press time.

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In the Union Budget 2024-25, finance minister Nirmala Sitharaman announced key measures to support MSMEs.

These include a credit guarantee scheme offering up to ₹100 crore for capital investment in machinery, public sector banks developing in-house credit assessment models, and a government-promoted fund to provide credit support during stress periods.

Mudra loan limits will be raised to ₹20 lakh, mandatory onboarding on the TReDS platform will be expanded, SIDBI will open new branches in MSME clusters, and financial support will be given to set up food irradiation units and safety labs.

In a written reply, minister for micro, small, and medium enterprises (MSMEs) Jitan Ram Majhi told the Lok Sabha on 25 July that out of the million registered MSMEs, 49,342 have closed down, resulting in the loss of 317,641 jobs.

As per the data provided by Majhi, Maharashtra saw the highest closures, with 12,233 MSMEs shutting down, resulting in 54,053 job losses. This was followed by Tamil Nadu (6,298 closures, 43,324 job losses), Uttar Pradesh (3,425 and 33,230), Gujarat (4,861 and 22,345) and Bihar (2,414 and 15,317).