Why India’s SMEs are suffering from Hormuz Strait crisis

The closure of the Strait of Hormuz, initially by Iran and later exacerbated by a U.S. naval blockade, has created ripple effects across India’s economy. Two notable regions impacted are Kerala, India’s spice production hub, and Morbi, a key ceramics manufacturing center. This disruption highlights the nation’s reliance on the critical maritime corridor for trade and energy flows.

India’s economic ties with the Middle East remain significant, with the region accounting for approximately 15% of the country’s exports and 20.1% of its imports from April to December 2025, as per Commerce Ministry data. A substantial portion of energy imports, exports, and remittances still pass through the strait, making its disruption particularly damaging.

“When the strait is blocked, the consequences spread rapidly—from increased fuel prices and inflation to reduced export revenues and pressure on household finances,” said Lekha Chakraborty, a senior economist at the National Institute of Public Finance and Policy.

Chakraborty emphasized that SMEs in southern Kerala and Gujarat’s Kandla are especially vulnerable. These businesses operate with profit margins as low as 5-8%, leaving them unable to withstand sudden jumps in freight, insurance, and logistical delays. Many rely on informal credit networks, which falter when payments are postponed, and fixed-price agreements with Gulf buyers limit flexibility.

Exporters in Kerala report tangible effects on the ground. The UAE is a major hub for India’s spice trade, not just as a buyer but as a redistribution point. Gulshan John, managing director of Nedspice, a global spice company, warned that the crisis risks reducing demand, delaying orders, and creating payment uncertainty. “Business isn’t stopping, but it’s becoming far less predictable,” he noted.

“The spice industry could lose between $90 million and $180 million over three months, against quarterly exports of around $1.2 billion,” John added.

Industry estimates suggest several hundred exporters in Kerala, particularly near Kochi, are already struggling. Abraham Thomas, a local agricultural exporter, highlighted that containers are stuck at key UAE and Oman ports, delaying shipments to Gulf markets. Meanwhile, freight rates have skyrocketed from $300 to $8,000 per container, and marine insurance premiums have risen due to heightened war risks.

Some vessels are detouring around the Cape of Good Hope, adding days to transit times and inflating costs. For businesses with tight schedules—especially those dealing in perishables or contract-based trade—this unpredictability can lead to losses or broken deals.

The crisis is spreading beyond spices. Rice exporters face shipment challenges, while industries dependent on Middle Eastern imports, such as fertilizers and chemicals, anticipate higher expenses. Textile, ceramic, and construction material manufacturers are also feeling the strain, as both imports and exports encounter delays.

“Freight rate surges are wiping out margins for clusters like Morbi ceramics and Surat textiles,” said Rushabh Shah, an investment banker from STIR Advisors. “Delayed shipments create liquidity issues, as cash flow stagnates and credit lines shrink.”

With no unified official tally, the true scale of the disruption remains unclear. Yet, the economic strain on SMEs underscores India’s fragile position in a global supply chain now threatened by the Hormuz Strait’s instability.