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The West Asia crisis is taking a toll on Indian manufacturing and services sectors. Private sector companies are grappling with demand slowdown and input cost inflation.

The seasonally adjusted HSBC Flash India Purchasing Managers' Index (PMI) Composite Output Index fell to a nearly three-and-a-half year low of 56.5 in March from a final reading of 58.9 in February.

The Flash PMI is an early, advanced estimate of economic activity in the manufacturing and services sectors. Though the March preliminary reading is above PMI’s expansion threshold of 50, the steep drop shows a loss of momentum.

Manufacturers seem to have been hit more. The HSBC Flash India Manufacturing PMI sank to a four-and-a-half-year low of 53.8 in March from 56.9 in February. Manufacturers said the West Asia conflict weighed on production growth, drove inflationary pressures higher and caused uncertainty among clients.

Services activity also moderated, with the business activity index down to 57.2 from 58.1 in February, marking the weakest growth since January 2025. Service firms reported international travel disruptions due to military strikes in the Gulf region.

On a composite basis, input costs surged to close to a four-year high with prices of aluminium, chemicals, electronic components, energy, food, iron ore, leather, oil, rubber and steel rising. Firms absorbed a large share of their additional cost burdens, as selling prices trailed input costs by a considerable margin. This could put firms under margin pressure.

India significantly relies on crude oil and gas imports from this region. So, rising energy prices due to supply disruptions are detrimental to the country's gross domestic product (GDP) growth, which slowed in the December quarter (Q3FY26) to 7.8% versus Q2FY26. Apart from seeping into retail inflation, higher energy prices for a longer period could widen India’s current account deficit. This is increasing pressure on the Indian rupee, which is already at a record low.

“Elevated risks of wider energy supply disruptions from a prolonged Iran conflict prompt a reset of India’s macro realities,” said Emkay Global Financial Services report dated 24 March. Brent at $80-85/barrel will be mostly manageable, but the macro impact would be more acute if prices average above $100/barrel, it cautioned.

With the revised oil forecast, Emkay has lowered its FY27 real GDP growth forecast by 0.4 percentage points to 6.6% and raised headline inflation by 0.3 percentage points to 4.3%.

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