In the first signs of the impact of the US-Iran war on the Indian economy, the private sector recorded its slowest expansion in more than three years in March, according to the latest HSBC PMI survey. Rising prices linked to the US-Israeli conflict with Iran have weighed on domestic demand. However, despite the subdued conditions at home, export orders climbed to an all-time high, according to a survey released on Tuesday.The figures point to a loss of economic momentum in the closing month of the fiscal year for one of the world’s fastest-growing major economies. They also underline the potential downside risks to both India’s growth outlook and the global economy stemming from tensions in the Middle East.Economic growth in India had already moderated last quarter, with GDP expanding at 7.8%, down from 8.4% in the quarter before, amid softer government expenditure and a slowdown in private investment.
US-Iran war impact: What indicators suggest
Experts have cautioned that the ongoing Middle East conflict will impact India’s growth story by feeding into inflation, current account deficit, fiscal deficit, rupee depreciation, and eventually hitting growth – though the exact impact would depend on the length of the war.Also Read | Fragile footing: How India, China face sizeable economic damage prospects from US-Iran war; outlook has grown more dauntingThe flash India Composite Purchasing Managers’ Index (PMI), compiled by S&P Global for HSBC, fell to 56.5 in March. This was significantly below the Reuters poll median estimate of 59.0 and lower than February’s final reading of 58.9, which had been expected to remain largely unchanged.Although the index stayed above the 50-mark that separates growth from contraction, the decline marked the steepest slowdown in a year and a half, indicating a clear easing in business activity.The manufacturing sector was hit the hardest, with its PMI dropping to a four-and-a-half-year low of 53.8 from 56.9. Heightened uncertainty and volatility linked to the Middle East conflict weighed on sentiment, leading to the weakest pace of factory output growth since August 2021.The services sector, which makes up the largest share of India’s GDP, also showed signs of slowing, with its PMI slipping to 57.2 from 58.1.Factory activity was scaled back as gas shortages, triggered by the conflict in Iran, disrupted production. The indices, which gauge business sentiment in the economy, are derived from preliminary survey data and may be subject to revision when the final PMI numbers are released next month.Also Read | PM Modi on Middle East war; lists key steps taken on oil & LPG – warns of lasting falloutPrice pressures escalated significantly during the period, as the cost of inputs such as oil, energy, food items, aluminium, steel and chemicals increased at the fastest rate since June 2022. At the same time, companies raised their selling prices to the highest level seen in seven months.“Cost pressures intensified, but companies are absorbing part of the increase by squeezing margins,” said HSBC’s chief India economist Pranjul Bhandari.India, the world’s third-largest importer of oil, depends on overseas sources for about 90% of its crude requirements and nearly half of its natural gas. This reliance leaves the country highly vulnerable to fluctuations in global energy prices, particularly as Iran has effectively blocked the Strait of Hormuz. Since the onset of the conflict, oil prices have surged by more than 40%.In response to the situation, the government introduced emergency steps and rationed gas supplies, giving priority to household consumption after Iran effectively closed the Strait of Hormuz, a crucial channel for India’s energy imports. The resulting supply crunch has affected a wide range of industries, including fertiliser and aluminium manufacturing as well as helium supplies used in semiconductor production, increasing the likelihood of a sustained drag on economic growth.The shortage also forced several hotels, restaurants and gas-dependent industrial units across the country to temporarily halt operations.According to HSBC, the rise in manufacturing output in March was the weakest since August 2021. The manufacturing sector bore the brunt of the slowdown, with companies citing the Middle East conflict, volatile market conditions and rising inflation as key factors weighing on growth.Businesses absorbed a significant portion of the higher input costs, while pricing pressures were more pronounced in the services sector. Even so, private sector firms continued to add employees, though the pace of hiring remained modest, HSBC noted.This spike in oil prices is likely to drive inflation higher from its pre-war level of 3.21% and could weigh on economic growth.
