West Asia Crisis Impact on India’s Manufacturing Sector

The ongoing geopolitical tensions in West Asia, involving countries such as the United States, Israel, and Iran, have begun to significantly affect India’s manufacturing sector. While India’s direct trade exposure to the region is limited in some sectors, the conflict has disrupted global supply chains, energy markets, and maritime routes, thereby creating widespread economic stress, particularly for export-oriented industries and MSMEs.

Impact on India’s Manufacturing Sector

The West Asia crisis has adversely affected India’s manufacturing sector by disrupting supply chains, increasing input costs, and creating uncertainty in export markets. Rising energy prices and logistical challenges have particularly strained MSMEs, leading to slower production and reduced profitability.

Disruption of Maritime Trade Routes: One of the most immediate impacts has been through disruptions in key shipping routes such as the Red Sea and the Strait of Hormuz. 

• Due to security concerns, shipping lines are rerouting vessels via the Cape of Good Hope, increasing transit time by 15-20 days.
• This has resulted in higher freight costs, delays in delivery schedules, and increased uncertainty for exporters. 
• For MSMEs, which operate on tight margins and limited working capital, such delays significantly strain liquidity and disrupt production cycles.

Surge in Input Costs due to Energy Shock: The conflict has led to a sharp rise in crude oil and natural gas prices, which has directly impacted manufacturing costs. 

• Many industries depend on petroleum-based inputs such as polyurethane (PU), ethylene vinyl acetate (EVA), and thermoplastic rubber (TPR).
• In sectors like leather and footwear, input costs have risen by nearly 30%. 
• Similarly, yarn, packaging materials, and chemicals have witnessed substantial price increases. 
• This has resulted in margin compression, as manufacturers are often unable to pass on the increased costs to global buyers.

Logistics and Freight Cost Escalation: 

• Freight rates have increased dramatically, in some cases rising from $200-300 per container to as high as $3,000 or more. 
• In addition, marine insurance costs have risen sharply due to heightened risks in conflict zones. These factors together have increased the overall cost of exports and reduced competitiveness in global markets.

Supply Chain Disruptions: The crisis has disrupted the supply of key raw materials, especially those sourced from or routed through the Gulf region. 

• Industries dependent on petrochemicals, wool, chemicals, and industrial inputs are facing shortages and delays.
• For example, exporters in Bhadohi, a major carpet cluster, are witnessing delays of 2-3 weeks in raw material inflows, with the possibility of the entire order cycle extending up to 60 days. 
• This has led to production slowdowns and uncertainty in fulfilling export commitments.

Impact on MSME Clusters: The impact has been particularly severe on MSME clusters in regions such as Agra (leather), Bhadohi (carpets), and Lucknow (handicrafts and textiles). These clusters are deeply integrated into global value chains and are highly sensitive to disruptions.

• Rising input costs, delayed shipments, and tightening liquidity have created a situation where nearly 50% of export cycles are disrupted. In some cases, small units are at risk of closure due to inability to absorb rising costs.

Demand Uncertainty and Order Disruptions: Global market uncertainty has led to order postponements and cancellations, particularly from West Asian markets. In some sectors, up to 30% of export flows are affected.

Payment cycles have also worsened, stretching from 30-40 days to 90-120 days, further straining working capital. Exporters are facing demurrage charges and inventory pile-ups due to shipment disruptions.

Macroeconomic Pressures: The crisis has also contributed to broader macroeconomic challenges. 

• The depreciation of the Indian Rupee to around ₹95 per dollar has increased the cost of imported inputs, creating a “double burden” for manufacturers.
• Additionally, rising global prices of fertilizers such as ammonia and urea have increased the government’s subsidy burden, indirectly affecting fiscal space and economic stability.

Decline in Manufacturing Momentum: The impact of the crisis is reflected in macro indicators such as the HSBC India Manufacturing PMI, which fell from 56.9 in February 2026 to 53.9 in March 2026, the lowest level in nearly four years. Although the sector remains in expansion (above 50), the slowdown indicates weakening growth in new orders, output, and overall business sentiment due to rising costs and uncertainty.

Sectoral Impact: 

• Leather and Footwear: Facing sharp rise in petroleum-based inputs and margin compression.
• Carpets and Textiles: Experiencing raw material shortages, delayed shipments, and export risks.
• Packaging and Chemicals: Witnessing significant cost escalation due to petrochemical dependence.
• Energy-Intensive Industries: Struggling due to high fuel prices and gas shortages.

Policy Response and Way Forward

To mitigate the impact, several measures can be considered:

• Providing temporary financial support such as interest equalisation and enhanced working capital assistance for MSMEs.
• Ensuring faster GST refunds and duty drawback mechanisms to ease liquidity constraints.
• Facilitating trade logistics through faster customs clearances and crisis-response frameworks.
• Promoting market diversification through Free Trade Agreements (FTAs) to reduce dependence on volatile regions.
• Strengthening domestic supply chains to reduce reliance on imported inputs.

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