India's private sector growth touches 3-year low: What's the reason?
What's the story
India's private sector has witnessed its slowest growth in over three years, HSBC's Flash India Composite Purchasing Managers' Index (PMI), compiled by S&P Global, shows. The decline is largely attributed to the impact of price shocks from the US-Israeli war on Iran on domestic demand. Despite this, international orders have hit a record high during this period.
PMI decline
PMI falls to 56.5 in March
The HSBC Flash India Composite Purchasing Managers' Index, a key indicator of private sector activity, fell to 56.5 in March. This is way below the median estimate of 59.0 in a Reuters poll and marks the sharpest decline in 18 months. A reading above 50 indicates expansion, but this downturn suggests a significant loss of momentum for India's economy.
Sector impact
Manufacturing sector worst hit
The manufacturing sector was the worst hit, with its PMI falling to a 4.5-year low of 53.8 from 56.9. The ongoing conflict in West Asia has created market volatility and consumer uncertainty, bringing factory output growth to its slowest pace since August 2021. Meanwhile, the services industry also witnessed a decline, with its PMI easing to 57.2 from February's reading of 58.1.
Cost increase
Inflationary pressures rise sharply
Inflationary pressures have intensified sharply, with input costs for oil, energy, food, aluminum, steel and chemicals rising at their fastest rate since June 2022. Selling prices also hit a seven-month high during this period. "Cost pressures intensified, but companies are absorbing part of the increase by squeezing margins," said Pranjul Bhandari, HSBC's chief India economist.
Oil impact
India highly vulnerable to oil price shocks
As the world's third-largest oil importer, India is highly vulnerable to oil price shocks. The country imports nearly 90% of its crude and almost half of its natural gas. The ongoing conflict in Iran has virtually blocked the Strait of Hormuz, leading to a 40% increase in oil prices since the war started. This could further push inflation beyond the pre-war level of 3.21% and slow down economic growth.