Impact of Middle East Conflict on India's Economic Activity

India's private sector activity experienced a significant slowdown in March 2026, with the HSBC flash Purchasing Managers' Index (PMI) dropping to 56.5 from 58.9 in February. This decline marks the weakest expansion since October 2022, as the ongoing conflict in the Middle East, particularly the U.S.-Israel war with Iran, has adversely affected domestic demand and increased costs across various sectors. The manufacturing PMI fell to 53.8, its lowest level in nearly 4.5 years, while the services PMI decreased to 57.2, reflecting a broader trend of economic contraction.

CNBC

The slowdown in India's economic activity is attributed to several interrelated factors. The war in the Middle East has led to gas shortages after Iran effectively shut the Strait of Hormuz, a crucial route for energy imports. This disruption has impacted industries reliant on gas, including fertilizer and aluminum production, and has forced many hotels and restaurants to temporarily close. Pranjul Bhandari, chief India economist at HSBC, noted that "output growth eased across both manufacturing and services as the energy shock unfolds," indicating that the conflict has created a ripple effect throughout the economy.

Bloomberg

Despite a record surge in new export orders, domestic demand has weakened significantly, with new orders rising at the slowest pace in over three years. Companies have reported that inflationary pressures and unstable market conditions have dampened growth, leading to increased input costs and selling prices. Many firms are absorbing these costs by lowering their profit margins, which could lead to weaker profitability in the future.

Middle East war drags India’s private business activity as demand cools, costs climb

In response to the economic challenges, the Indian government has implemented emergency measures, including rationing gas supplies to prioritize household needs. This decision reflects the urgency of addressing the energy crisis while attempting to stabilize the economy. Bhandari emphasized that "softer domestic demand weighed on new orders," highlighting the precarious balance between managing costs and maintaining growth.

Middle East war drags India’s private business activity as demand cools, costs climb

Critics argue that the government's measures may not be sufficient to mitigate the economic fallout from the Middle East conflict. The reliance on external demand amid deteriorating global conditions raises concerns about the sustainability of India's economic recovery. Analysts caution that the current growth figures may not accurately reflect the underlying economic challenges, as many businesses are still navigating the complexities of increased costs and reduced consumer spending.

Middle East war drags India’s private business activity as demand cools, costs climb

Looking ahead, businesses remain cautiously optimistic about future growth, citing potential improvements in efficiency and new client inquiries. However, the underlying indicators suggest a fragile recovery, with backlogs barely growing and a notable drop in pending work for goods producers. The ongoing geopolitical tensions in the Middle East will likely continue to influence India's economic landscape in the coming months.

Middle East war drags India’s private business activity as demand cools, costs climb

• “Output growth eased across both manufacturing and services as the energy shock unfolds,” — Pranjul Bhandari, Chief India Economist, HSBC

Bloomberg

• “Softer domestic demand weighed on new orders, which rose at the slowest pace in more than three years, despite a record surge in new export orders,” — Pranjul Bhandari, Chief India Economist, HSBC

CNBC