US-Iran Conflict Impacts India’s Private Sector Growth as Manufacturing Activity Declines to 4.5-Year Low
In the wake of the ongoing US-Iran conflict, India is witnessing a significant slowdown in its economic growth, as indicated by the latest HSBC Purchasing Managers’ Index (PMI) survey. The private sector’s expansion has hit its lowest point in over three years, primarily due to rising prices linked to the geopolitical tensions. While export orders have reached an all-time high, domestic demand is faltering, raising concerns about the broader implications for India’s economy and its growth trajectory.
Indicators of Economic Slowdown
The flash India Composite PMI, compiled by S&P Global for HSBC, recorded a decline to 56.5 in March, falling short of the expected 59.0 and down from February’s reading of 58.9. Although the index remains above the critical 50-mark that signifies growth, this drop represents the steepest slowdown in a year and a half, highlighting a notable easing in business activity. The manufacturing sector has been particularly affected, with its PMI plummeting to a four-and-a-half-year low of 53.8, down from 56.9. This downturn reflects heightened uncertainty and volatility stemming from the Middle East conflict, resulting in the slowest pace of factory output growth since August 2021.
The services sector, which constitutes the largest portion of India’s GDP, is also showing signs of deceleration. Its PMI decreased to 57.2 from 58.1, indicating a broader trend of slowing economic activity. Contributing to this decline are gas shortages caused by the conflict in Iran, which have disrupted production across various industries. The PMI figures, derived from preliminary survey data, may be revised in the final report next month, but the current trends suggest a worrying economic landscape.
Rising Price Pressures
During this period, price pressures have intensified significantly, with the costs of essential inputs such as oil, energy, food items, aluminum, steel, and chemicals rising at the fastest rate since June 2022. In response, companies have increased their selling prices to the highest level seen in seven months. HSBC’s chief India economist, Pranjul Bhandari, noted that while cost pressures have escalated, businesses are absorbing part of the increases by tightening their profit margins.
India’s heavy reliance on imported oil—approximately 90% of its crude requirements—makes it particularly vulnerable to fluctuations in global energy prices. Since the onset of the conflict, oil prices have surged by over 40%. The government has implemented emergency measures, including rationing gas supplies to prioritize household consumption, following Iran’s effective closure of the Strait of Hormuz, a vital route for India’s energy imports. This supply crunch has adversely affected various sectors, including fertilizer and aluminum manufacturing, as well as helium supplies critical for semiconductor production.
Impact on Industries and Employment
The ongoing energy crisis has led to temporary halts in operations for several hotels, restaurants, and gas-dependent industrial units across the country. According to HSBC, the rise in manufacturing output in March was the weakest since August 2021, with the manufacturing sector facing the most significant challenges. Companies have cited the Middle East conflict, volatile market conditions, and rising inflation as key factors hindering growth.
Despite these challenges, private sector firms have continued to add employees, although the pace of hiring remains modest. The spike in oil prices is expected to drive inflation higher from its pre-war level of 3.21%, which could further weigh on economic growth. As the situation evolves, experts warn that the long-term implications of the conflict on India’s economy will depend on its duration and the extent of its impact on global markets.
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