The prolonged crisis in West Asia is casting a long shadow over Gujarat's micro, small and medium enterprises (MSMEs), with the coming financial quarters expected to bring significant cost pressures, weaker margins, and uncertainties over exports. Industrial clusters in Morbi, Surat, Vadodara, and Ahmedabad are among the most vulnerable, according to a recent report by Crisil Intelligence. The report suggests that the conflict could shave nearly 100 basis points off MSME revenue growth this fiscal year while compressing operating margins by 50 to 100 basis points across various sectors.
Export-Oriented and Energy-Intensive Clusters at Risk
Gujarat's export-oriented and energy-intensive manufacturing clusters are particularly exposed. Surat's textiles and gems and jewellery sectors, Ahmedabad's dyes and pigments industries, Morbi's ceramic factories, and Vadodara's chemical units are likely to experience the sharpest impact due to rising costs of energy-linked raw materials and trade disruptions. Industry insiders report that the pressure is already evident in the increasing prices of gas, petrochemical derivatives, and imported inputs. Additionally, concerns over weakening export sentiment in Middle Eastern markets are adding to the challenges.
Two-Fold Challenge for MSMEs
Observers note that the challenge for Gujarat's MSMEs is twofold: rising costs on one side and limited pricing power on the other. Unlike larger corporations, smaller businesses have less flexibility to absorb prolonged volatility in energy and raw material prices, disruptions in shipping routes, and reduced export demand. To help mitigate the impact, the Union government has approved an expanded Emergency Credit Line Guarantee Scheme (ECLGS 5.0). However, the scheme's effectiveness depends on how quickly credit reaches smaller businesses that are already grappling with shrinking margins and uncertain demand.
Morbi's Ceramic Industry: A Slow Revival Amid Challenges
Morbi, which accounts for over 80% of India's tile production, could be among the worst-hit. The Crisil report highlights that 80 to 85 percent of production in the cluster runs on gas, and a significant portion of exports goes to Middle Eastern markets now in a conflict zone. Despite these challenges, operations are beginning to stabilize. Manoj Aervadiya, president of the Morbi Ceramics Association, noted that gas prices have nearly doubled from around Rs 47 per cubic metre in February to Rs 88 per cubic metre now, including taxes. This has increased production costs, but manufacturers have been able to pass on the costs to customers because pipeline stocks have been exhausted, creating new demand.
However, the road remains bumpy. Manpower shortages are preventing units from reaching full production capacity. Former MCA president K G Kundariya explained that while demand is good for now, the future looks uncertain. Input costs have risen substantially, and the current labour shortage is not enabling the industry to operate at full throttle. As a result, large units are sustaining themselves, but smaller units are underutilizing their capacities. Temporary shutdowns had sharply reduced inventories across the supply chain, creating fresh demand once production resumed. This has allowed ceramic companies to pass on higher input costs without significantly affecting margins. According to industry estimates, Morbi has around 800 ceramic units and exported products worth nearly Rs 22,000 crore in FY26.
Chemical Units Face Margin Contraction
The West Asia conflict has increased prices of key chemicals that feed Gujarat's vital sectors. The crisis threatens to put Gujarat's chemicals and dyes ecosystem in the red as MSMEs in Vadodara and Ahmedabad battle rising input costs, higher freight rates, and working capital stress amid weak demand. Manufacturers report that the sector is heavily dependent on imported petroleum-based feedstock and sulphur-based raw materials. Prices have risen steeply in recent months due to the geopolitical crisis, shipping disruptions, and the rupee's depreciation against the dollar. Crisil Intelligence projects a 150 to 250 basis point margin contraction for Vadodara's chemical MSMEs this fiscal year, with Ahmedabad's dyes and pigments sector facing similar pressure.
Bhupendra Patel, chairman of Chemexcil's Gujarat region, stated that the rupee's depreciation has sharply increased import costs. Sulphur prices have risen from around Rs 17 per kg to nearly Rs 105 per kg in the last two to three months. Sulphur and petroleum-linked derivatives are critical inputs for sulphuric acid manufacturing, which in turn feeds dyes, agrochemicals, and pharma intermediates. Prices of Oleum 23, Oleum 65, and chloro sulphuric acid have also surged. Manufacturers estimate that production costs for sulphuric acid and allied products have increased by nearly 20 percent. Another blow is the subdued demand domestically and internationally, which has restricted the industry's ability to pass on costs. Capacity utilization has dropped to nearly 50 percent, leading to a working capital crisis. Patel urged a special support package for MSMEs. Manufacturers of dye intermediates, inorganic chemicals, pesticides, and pharma APIs in the Nandesari industrial belt have also reported tighter conditions due to rising marine gas oil prices and costlier freight and container charges. Bharat Shah, president of the Nandesari Industries Association, noted that buyers insist on lower prices while raw material and fuel costs continue to rise, forcing companies to focus on protecting revenues and surviving this phase.
Textiles Sector: Costs Surge, Demand Weak
The story is similar for Surat's textiles and garments sector, with rising raw material and fuel costs, weak demand, and export disruptions due to the war. Prices of raw materials like yarn and coal have risen by nearly 30 percent in recent months, largely due to shipping disruptions from the conflict. Jitu Vakharia, president of the South Gujarat Textile Processors' Association, stated that there is little hope of prices easing anytime soon. Textile exporters report that global trade route disruptions and US tariffs have dented export orders. Domestically, inflationary pressures have weakened demand. Nikhil Madrasi, president of the Southern Gujarat Chamber of Commerce and Industry, highlighted that logistical bottlenecks and the absence of insurance for shipping vessels have severely affected dispatches, resulting in losses for exporters. Production has dipped by 15 percent in some units due to a migrant labour exodus after cooking gas shortages.
Diamond Business Loses Its Glitter
Surat's gems and jewellery units, already grappling with a prolonged slowdown in demand for natural diamonds, are facing fresh uncertainty amid West Asia tensions. The sector was already reeling from weak demand in the US and China, sanctions on Russian rough diamonds, and disruptions from the Russia-Ukraine conflict. The West Asia war has hit emerging Gulf markets that Indian exporters were targeting, dampening hopes of recovery. Industry players say the business of cutting and polishing natural diamonds is down by nearly 30 percent, with fears of a deeper slowdown as trade sentiment weakens. Key trading hubs including Surat, Mumbai, Dubai, and Antwerp are facing the brunt.
Falling prices and subdued demand have made diamantaires cautious about purchasing rough stones and booking fresh orders. Vallabh Lakhani, founder of Kiran Gems, noted that the impact on the diamond cutting and polishing industry has deepened as the US-Iran conflict is a continuation of existing global factors. Natural diamond manufacturing and trade are slow, and imports of roughs are dropping. However, lab-grown diamonds (LGDs) are helping the majority of workers keep their jobs, though the contribution of LGDs in value remains under 10 percent compared to natural diamonds. Industry data shows that gross exports of cut and polished diamonds fell by 8 percent to $12.15 billion in FY26. The decline continued into the current fiscal year, with CPD exports dropping 19 percent year-on-year to $890 million in April, while March exports declined 27 percent to $839 million. Overall, gems and jewellery exports declined 3 percent to $27.7 billion in FY26.
