How US-Iran war is affecting India's economy this March
What's the story
India's economic growth showed resilience until February 2026, driven by strong domestic demand and infrastructure development. However, the Finance Ministry's March Monthly Economic Review has flagged early signs of moderation in the economy. This comes as external shocks from West Asia crisis and rising crude prices start to impact India. The report highlights that "economic activity in India remained robust up to February 2026," with both supply- and demand-side indicators performing well during this period.
Economic indicators
Manufacturing, services, and consumption activity expand
High-frequency indicators have backed the report's findings, with manufacturing and services activity staying in expansion territory. Consumption indicators such as vehicle sales and digital payments also showed strong growth. The review highlights that "strong growth in steel and cement production... underscores sustained momentum in infrastructure and construction activity, supported by public capital expenditure." This shows government-led capex is still effective in anchoring growth despite global volatility.
Market disruption
West Asia shocks disrupt India's logistics
The report's tone shifts as it examines early signals from March, when geopolitical tensions in West Asia started to disrupt energy markets and logistics chains. The review says, "The recent shocks are being transmitted through higher input costs, supply constraints, and pressures across sectors." These factors have led to early signs of moderation in economic activity. This is visible in some high-frequency indicators such as a month-on-month decline in e-way bill generation and softening output growth in flash PMI estimates.
Cost pressures
Energy and logistics costs squeeze industries
Rising input costs, particularly for energy and logistics, are emerging as major challenges. The report notes that supply disruptions and rising freight and insurance costs are being passed on to domestic production chains, creating cost-push pressures across industries. These pressures are especially felt in sectors relying heavily on imported inputs. Here, growth risks are becoming increasingly apparent.
Demand stability
Domestic demand resilient but rural sentiment softening
Despite the external shocks, domestic demand has remained relatively stable. The review notes that "demand conditions appear relatively resilient," backed by continued growth in vehicle registrations and digital transactions. However, rural sentiment has shown some softening. This divergence between steady demand and weakening supply conditions indicates that the slowdown is being driven more by cost and supply constraints than a collapse in consumption.