Private Sector Growth at 3-Year Low, How the Iran War Is Dampening India’s Economic Momentum
India’s private sector is expected to have grown at its slowest pace in more than three years in March, as market disruptions and energy shocks due to the Iran war dampened domestic demand and pushed up costs. The HSBC flash India Composite Purchasing Managers’ Output Index (PMI), compiled by S&P Global, plunged to 56.5 in March, down from the final reading of 58.9 in February. The March reading was the lowest since October 2022, when it was 55.5. While the index remains above 50—the mark that separates growth from contraction—the sharp decline signals a significant loss of momentum in an economy that has been one of the world’s fastest-growing in recent years.
The flash PMI is an advance indication of the final Manufacturing, Services, and Composite PMI data for a month, typically released a week before the final indices. Based on around 90 per cent of total PMI survey responses received each month, it offers a reliable early warning of economic trends. The March data sends a clear warning: the war in West Asia is now directly affecting India’s economic activity.
Companies surveyed reported that orders rose at the slowest pace in more than three years, despite a record surge in new export orders. This paradox—record exports alongside slowing domestic orders—is revealing. It suggests that while Indian firms may be benefiting from supply chain shifts or competitive pricing in global markets, the domestic economy is feeling the strain of higher costs and heightened uncertainty. “Orders, which rose at the slowest pace in more than three years, despite a record surge in new export orders,” noted Pranjul Bhandari, chief India economist at HSBC.
The manufacturing sector has been hit particularly hard. The HSBC Flash India Manufacturing PMI fell to a four-and-a-half-year low of 53.8 in March from 56.9 in February. The March figure—a weighted average of new orders, output, employment, suppliers’ delivery times, and stocks of purchases indices—was the lowest since December 2021. Firms reported that the Iran war had disrupted markets, pushed up inflationary pressures, and dampened demand as uncertainty grew among clients and consumers. As a result, factory output grew at its slowest pace since August 2021. This is not a marginal slowdown; it is a significant deceleration that will have ripple effects across the economy.
The services sector, which has been a key driver of India’s post-pandemic recovery, is also feeling the strain. The HSBC Flash India Services PMI Business Activity Index fell to 57.2 in March, down from 58.1 in February, the lowest since January 2023. Companies cited disruptions to international travel and the impact of US-Israel strikes and Iran’s retaliatory attacks. Services are more sensitive to consumer sentiment than manufacturing, and the sharp drop in the index suggests that households and businesses are becoming more cautious about spending.
New orders eased across both sectors, with collective sales rising at the weakest pace since November 2022. The slowdown in domestic demand is particularly concerning because it is happening at a time when the government has limited fiscal space for stimulus and the Reserve Bank of India (RBI) is constrained by inflationary pressures. The tools that were deployed during the COVID-19 pandemic—massive fiscal spending and ultra-loose monetary policy—are not available this time.
In contrast to the slowdown in domestic orders, international sales rose at a record pace in March, with service providers leading the expansion. This divergence suggests that Indian exporters may be benefiting from global supply chain shifts, as companies seek to diversify away from China or from regions directly affected by the conflict. However, the export surge is not enough to offset the domestic slowdown. The Indian economy is still primarily driven by domestic consumption, and when that falters, growth falters.
The most immediate transmission mechanism of the war’s impact is through prices. Input costs for private companies rose at the quickest pace in close to four years, with prices rising for a wide range of items, including aluminium, chemicals, electronic components, energy, food, iron ore, leather, oil, rubber, and steel. The list reads like an inventory of modern industry. When the cost of these basic inputs rises, it is only a matter of time before the increases are passed on to consumers, feeding inflation and further dampening demand.
The energy shock is the most direct channel. India imports 85 per cent of its crude oil requirements, and the spike in global oil prices has increased the cost of fuel, transportation, and manufacturing across the board. The higher cost of oil also affects the cost of electricity, as many power plants run on imported coal, the price of which is also influenced by energy markets. The cascading effect is immense.
The PMI data also suggests that the impact of the war is being felt unevenly across sectors. Manufacturing, which is more energy-intensive and more exposed to global supply chains, has been hit harder than services. Within manufacturing, sectors that rely on imported inputs or that are energy-intensive are likely to be most affected. The rise in input costs for aluminium, chemicals, and steel is a direct result of the disruption in global commodity markets.
The slowdown in the private sector has significant implications for employment. When new orders slow, companies cut back on hiring, and when the slowdown persists, they begin to lay off workers. The PMI survey does not yet show a contraction in employment, but the trend is concerning. If the slowdown continues, job losses will follow, and with them, further declines in consumption and demand.
The government’s response to the crisis has been constrained. The fiscal deficit is already stretched, and the RBI is focused on controlling inflation. The tools that were used to boost the economy during the COVID-19 pandemic are not available. This means that the private sector must bear the brunt of the adjustment. The slowdown in the PMI is a measure of how well the private sector is coping with that burden.
The PMI data also raises questions about the durability of India’s economic recovery. After the pandemic, India’s economy rebounded strongly, driven by pent-up demand and government spending. But that recovery was always vulnerable to external shocks. The war in West Asia is the most significant such shock since the pandemic, and the PMI data suggests that the Indian economy is more exposed than many had assumed.
The slowdown is happening at a time when other major economies are also facing headwinds. The global economy is slowing, and the war in West Asia is adding to that pressure. For India, which has positioned itself as a bright spot in a gloomy global landscape, the slowdown in the PMI is a reminder that no economy is immune to global shocks.
The March PMI data is a warning. It is not a crisis yet, but it is a signal that the crisis is approaching. The government and the RBI will need to monitor the situation closely, and be prepared to act if the slowdown deepens. In the meantime, businesses will have to navigate an environment of rising costs and slowing demand. The record surge in export orders offers some hope, but it is not enough to offset the domestic slowdown. The next few months will be critical. If the war in West Asia continues, and if oil prices remain high, the slowdown in the private sector is likely to intensify. The PMI data for March is a snapshot of an economy under stress. The question is whether that stress will be temporary or the beginning of a longer downturn.
Questions and Answers
Q1: What does the March flash PMI data reveal about India’s private sector growth?
A1: The HSBC flash India Composite PMI plunged to 56.5 in March from 58.9 in February, marking the slowest pace of growth in more than three years. While still above the 50-mark that separates growth from contraction, the sharp decline signals a significant loss of economic momentum.
Q2: How has the manufacturing sector been affected by the Iran war?
A2: The manufacturing sector has been hit particularly hard. The HSBC Flash India Manufacturing PMI fell to a four-and-a-half-year low of 53.8 in March. Firms reported that the war had disrupted markets, pushed up inflationary pressures, and dampened demand as uncertainty grew among clients and consumers. Factory output grew at its slowest pace since August 2021.
Q3: What is the paradox in the PMI data regarding domestic orders versus export orders?
A3: The data shows a striking paradox: domestic orders rose at the slowest pace in more than three years, while international sales (exports) rose at a record pace. This suggests that while Indian firms may be benefiting from global supply chain shifts, the domestic economy is feeling the strain of higher costs and heightened uncertainty.
Q4: What is happening to input costs, and what sectors are being affected?
A4: Input costs for private companies rose at the quickest pace in close to four years. Prices are rising across a wide range of items, including aluminium, chemicals, electronic components, energy, food, iron ore, leather, oil, rubber, and steel. This is feeding into inflation across the economy.
Q5: What are the broader implications of the PMI slowdown for the Indian economy?
A5: The slowdown has significant implications for employment (companies may cut hiring or lay off workers), consumption (higher prices and uncertainty dampen demand), and overall growth. It also reveals that India’s post-pandemic recovery is more vulnerable to external shocks than many had assumed, and that the government’s fiscal space to respond is constrained.
