India’s private sector growth slows to 3-year low amid West Asia war

India’s private sector growth slowed to its weakest level in more than three years in March, as price shocks linked to the US-Israeli war on Iran weighed on domestic demand, even as international orders rose to a record high, a survey showed on Tuesday.

The data points to weakening activity in the final month of the fiscal year for one of the world’s top-performing economies and underscores risks to both India and the global economy from the West Asia conflict.

India’s GDP growth had already slowed to 7.8% in the last quarter from 8.4% in the previous one, as government spending and private investment moderated.

HSBC’s flash India Composite Purchasing Managers’ Index (PMI), compiled by S&P Global, fell to 56.5 in March, below the median forecast of 59.0 in a Reuters poll that had expected little change from February’s final reading of 58.9.

While a PMI reading above 50 indicates expansion, the latest drop was the sharpest in 18 months, signalling a clear loss of momentum.

Manufacturing activity was hit the most, with its PMI falling to a 4-1/2-year low of 53.8 from 56.9. The West Asia conflict fuelled market instability and consumer uncertainty, pushing factory output growth to its weakest level since August 2021.

The services sector, which accounts for the majority of India’s GDP, also slowed, with its PMI easing to 57.2 from 58.1.

Inflationary pressures rose sharply during the month. Input costs — including oil, energy, food, aluminium, steel and chemicals — increased at their fastest pace since June 2022, while selling prices rose to a seven-month high.

“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 oil importer, sources roughly 90% of its crude and nearly half its natural gas from abroad, making it vulnerable to oil price shocks. The risk has increased as Iran has effectively blocked the Strait of Hormuz. Oil prices have already surged more than 40% since the war began.

The rise in energy costs threatens to push inflation, which stood at 3.21% before the war began, higher and further slow economic growth.

A key positive was a record increase in international orders, the highest since the sub-index was introduced in September 2014. Goods producers and service providers reported new business from clients across Asia, Europe, the Americas and the West Asia.

Despite softer domestic demand and rising costs, business confidence improved to its highest level since September 2023. This supported the fastest pace of job creation since August.

(With inputs from Reuters)