India’s private sector growth dropped to its lowest in three years in March, as the conflict involving the U.S., Israel, and Iran unsettled markets and hurt domestic demand. The latest Purchasing Managers’ Index (PMI) data show a marked slowdown just as the fiscal year drew to a close.
Private Sector Expansion Hits Weakest Pace Since 2020
India's private sector expanded at its slowest rate in over three years during March, according to HSBC's flash India Composite PMI compiled by S&P Global. The index dropped sharply to 56.5 from February’s 58.9, falling well below expectations. While a reading above 50 still signals growth, the pace slackened considerably, marking the sharpest loss of momentum in a year and a half.
Manufacturing took the biggest hit, with its PMI sliding to 53.8 — a four-and-a-half-year low — down from 56.9 in February. The Middle East conflict shook up markets and made consumers uncertain, causing factory output growth to slow to its weakest since August 2021. The services sector, which forms the lion’s share of India’s GDP, also slowed, with the PMI slipping to 57.2 from 58.1.
Inflation Pressures Mount Amid Soaring Oil Prices
Input costs surged at the fastest pace since June 2022, driven by rising prices for oil, energy, food, aluminum, steel, and chemicals. Selling prices climbed to their highest level in seven months. Oil prices have spiked more than 40% since the Middle East war kicked off, largely because Iran has effectively blocked the Strait of Hormuz, a critical global shipping route for crude.
Since India imports about 90% of its crude oil and nearly half its natural gas, it's especially vulnerable to these shocks. Inflation was already at 3.21% before the conflict erupted, and the jump in energy costs threatens to push inflation higher, which could further slow economic growth. HSBC’s chief India economist, Pranjul Bhandari, said companies are feeling the squeeze and absorbing some of the increased costs by tightening profit margins.
International Orders Surge, Offering a Silver Lining
Even with the slowdown at home and rising costs, international demand grew strongly. New export orders hit a record high since the sub-index was introduced in September 2014. Producers and service providers reported strong new business from across Asia, Europe, the Americas, and the Middle East.
The surge in global demand somewhat offset the decline in domestic orders.
Business optimism also climbed to its highest level since September 2023, encouraging employers to hire. Job creation accelerated at the fastest rate since August, signaling that companies remain cautiously confident about future prospects despite current headwinds.
Economic Growth Already Cooling Before Conflict
India’s gross domestic product growth had slowed to 7.8% in the previous quarter from 8.4% before that, as government spending and private investment cooled down. The March PMI readings suggest the slowdown is deepening in the final month of the fiscal year, raising concerns about the country’s economic outlook amid global uncertainty.
The Middle East war adds an extra layer of risk — not just for India but for global markets — with energy prices and geopolitical tensions feeding into inflation and consumer sentiment worldwide. India’s heavy dependence on imported energy makes it especially vulnerable.
India's private sector is facing tough challenges as the Middle East conflict pushes up costs and cools domestic demand. Still, strong international orders and growing business confidence suggest some resilience. How India handles these challenges will shape its growth in the coming months.
