BENGALURU, March 24 - India’s private sector recorded its slowest expansion in more than three years in March, a survey released on Tuesday showed, as price shocks linked to the U.S.-Israeli war on Iran dented domestic demand even while overseas sales surged to a record.
HSBC’s flash India Composite Purchasing Managers’ Index (PMI), which is compiled by S&P Global, fell to 56.5 in March, substantially below the median forecast of 59.0 from a Reuters poll that had anticipated little change from February’s final 58.9 reading. A PMI reading above 50 denotes expansion, but the fall represented the sharpest loss of momentum in 18 months.
Manufacturing activity was the most affected, with the sector’s PMI sliding to 53.8 from 56.9 - its weakest since late 2018. The survey report linked the slowdown in factory output growth to market instability and consumer uncertainty prompted by the Middle East conflict, noting that production expanded at its softest pace since August 2021. The services PMI, which covers the bulk of India’s economic output, also eased to 57.2 from 58.1.
Input cost inflation accelerated markedly across a broad set of commodities, the survey found. Costs for oil, energy, food, aluminium, steel and chemicals rose at the fastest rate since June 2022, while firms reported selling prices climbing to a seven-month high. HSBC’s chief India economist Pranjul Bhandari was quoted saying:
"Cost pressures intensified, but companies are absorbing part of the increase by squeezing margins."
The survey underscored India’s vulnerability to oil price volatility. As the world’s third-largest oil importer, India sources roughly 90% of its crude and nearly half of its natural gas from overseas, a reliance the report described as acute in the context of Iran’s near blockage of the Strait of Hormuz. Oil prices have already risen by more than 40% since the war began, the survey noted, a spike that threatens to push inflation - which stood at 3.21% before the conflict - higher and to slow economic growth.
Despite the headwinds to domestic activity and cost escalation, there was a notable bright spot. International orders surged to a record high for the sub-index that has been part of the survey since September 2014, with both goods producers and service providers reporting increased business from clients across Asia, Europe, the Americas and the Middle East.
Confidence among firms remained resilient in the face of these challenges. Business optimism climbed to its strongest level since September 2023 and companies recorded the fastest pace of job creation since August, even as new domestic orders moderated and cost pressures mounted.
The PMI data arrives against a backdrop of a broader slowdown in headline growth. India’s GDP growth had already eased to 7.8% in the most recent quarter from 8.4% in the prior quarter, a deceleration that was attributed to cooling government spending and private investment.
Implications - The survey highlights a mix of pressures and opportunities for India’s economy: rising global demand for Indian goods and services is supporting exports, but higher commodity and energy costs tied to the Middle East conflict are eroding margins, lifting inflation risks and weighing on domestic demand and manufacturing.