Just as micro, small and medium enterprises (MSMEs) were adjusting to lower US tariffs, fresh challenges have emerged at the close of 2025-26 as the US-Iran conflict disrupts key shipping lanes and trade routes in West Asia.
The closure or suspension of shipping through and around the Strait of Hormuz has left consignments stranded at transhipment hubs or stuck in domestic warehouses, tightening liquidity at a time when margins are already thin, according to industry representatives.
The disruption follows months of pressure from steep US tariffs of up to 50%, imposed between August 2025 and February 2026.
Although the US administration cut tariffs to 18% after India signed an interim arrangement with Washington on 6 February and later to 10% after the US Supreme Court struck down President Donald Trump's reciprocal tariffs, exporters say the relief has been offset by rising freight and insurance costs, along with transit uncertainty due to the West Asia conflict.
West Asia and North Africa remain a key trading region for India, driven by both energy imports and non-oil exports. In 2024-25, India’s merchandise exports to major WANA (West Asia and North Africa) markets exceeded $64 billion, while total bilateral trade crossed $216 billion, according to the commerce ministry.
For MSMEs, accounting for about 45% of India’s total exports, any prolonged instability threatens not just margins but order continuity.
“We are fortunate that our goods are not stuck in transit,” said Sushma Morthania, director at Shezar Technologies, which exports electronic components worth around ₹50 lakh each month. Nearly 40% of her shipments go to West Asia, Europe, and parts of Latin America via Dubai’s Jebel Ali Port. She said some buyers placed orders on hold for at least a week ahead of the conflict, adding that storage constraints make it costly for smaller firms to hold finished inventory.
The cost of war
Industry body India SME Forum, representing about 97,000 MSMEs, estimated that a week-long disruption could affect export orders worth around ₹8,500 crore, equivalent to roughly 13% of the country’s monthly non-oil exports.
“Along with higher freight and insurance costs, this could hit MSMEs hard,” said Vinod Kumar, president of the forum. He warned that if disruptions persist beyond three months, exporters could face 10-20% order cancellations, inventory pile-ups and potential job losses of 100,000-200,000 workers in export clusters, given the limited diversification options available to smaller firms.
Sectors such as engineering are also seeing costs rise due to the war. “The war threatens to erode our competitiveness due to rising logistics and insurance costs. The overall situation seems very volatile. Trade disruptions in this region, particularly in the UAE (United Arab Emirates) and Saudi Arabia, are significantly affecting our shipments. All the factors combined are set to increase input cost, thus putting further strain on our revenue and profitability,” said Pankaj Chadha, chairman, Engineering Export Promotion Council (EEPC).
This is the second major disruption linked to West Asia since the Red Sea crisis of late 2023, when attacks by Houthi rebels forced vessels to reroute around the Cape of Good Hope. The current conflict, involving nation states, has again led to diversion of vessels, adding 10-15 days to transit times and raising logistics costs by an estimated 30-50%, according to industry executives.
Geopolitical analysts noted unlike the Red Sea episode involving non-state actors, the present conflict involves sovereign states, which have both the capacity to sustain hostilities and the incentive to contain economic fallout. For MSMEs, however, even short-term disruptions can strain cash flows, delay payments, and unsettle production schedules.
“The current US-Iran escalation marks a shift from proxy-level disruption to direct state confrontation, which raises the stakes for global trade and energy corridors,” said Amit Singh, associate professor at the Special Centre for National Security Studies, Jawaharlal Nehru University.
Mukesh Mohan Gupta, president of the Chamber of Indian Micro Small and Medium Enterprises, said that "we should wait and watch for some time, especially as several countries are calling for restraint and peace.
“However, if the conflict continues for a prolonged period, it will significantly impact the MSME sector on both fronts. Exports will become costlier due to rising logistics and insurance expenses, while manufacturing will also be affected as imported raw materials turn more expensive. This could eventually lead to higher domestic prices as we go, adding to cost pressures across the value chain,” Gupta said.
MSMEs contribute about 30% of the country's gross domestic product (GDP) and over 45% of exports, which, in volume terms, stand next only to agriculture, according to the Small Industries Development Bank of India (SIDBI).