Whalesbook
Core Sector Output Falls Sharply
India's key core sector output fell 0.4% in March 2026, its weakest showing in nearly two years and a sharp turnaround from February's 2.8% growth. This decline was mainly due to sharp drops in fertilizers (-24.6%), crude oil (-5.7%), coal (-4.0%), and electricity (-0.5%). The fall shows the immediate impact of soaring global energy costs and supply chain disruptions. Tensions in the Middle East, which grew in late February 2026, have disrupted energy supplies. Brent crude averaged $103 per barrel in March and is expected to reach $115 in the second quarter. Natural gas prices for April 2026 were also set at a much higher $10.76 per million British thermal units (MMBtu). However, sectors like natural gas, steel, and cement offered some support, growing 6.4%, 2.2%, and 4.0% respectively in March. For the full financial year 2025-26, the core sector grew a provisional 2.6%.
Key Sectors Show Mixed Performance
The March figures show a clear split between industries struggling with shortages and those remaining strong. The fertilizer sector was hit hardest, with production down almost 25% due to critical natural gas shortages. This highlights India's reliance on imported gas, as 86% of liquefied natural gas (LNG) for fertilizer plants comes from West Asia. In contrast, steel and cement sectors, key for infrastructure and building, saw modest growth in March and had strong yearly performance for FY25-26. Steel output rose 9.1% and cement output rose 8.6%. Finished steel use grew 7.6% for the fiscal year, and India became a net steel exporter. Demand for fuel and steel also stayed relatively strong, suggesting underlying economic activity hasn't yet buckled under cost pressures.
Rising Energy Costs and Supply Chain Woes
Efforts are being made to find new import sources and restore gas supplies to industries, but input costs have soared. While gas availability for fertilizers has improved from its lowest points, the price increase is significant. Economists caution that the full impact on profit margins from these higher energy and input costs will be felt more strongly in the April quarter, rather than being fully reflected in March's output numbers. This delayed impact is a key concern, as India's inflation forecast for FY27 has been raised to 4.6% by the Reserve Bank of India (RBI), with core inflation at 4.4%, both above the central bank's 4% target. Projections show that a 10% change in oil prices from the assumed $85 per barrel could raise inflation by 0.5 percentage points. Past energy price shocks in 1973, 1981, and 1991 resulted in severe inflation and trade deficits for India.
Businesses Brace for Squeezed Margins
The recent contraction in core sector output hides a growing risk: squeezed profit margins for businesses. Soaring energy prices, worsened by Middle East disruptions, will naturally hurt company profits as higher costs move through supply chains. The fertilizer sector's extreme vulnerability shows the wider risks of relying on imports, with sales currently high but supply stability a concern. Additionally, the ongoing slowdown in residential real estate, where new project launches fell 28% in January-February 2026, puts pressure on cement demand, even with strong government spending on infrastructure. India's government debt was 80.9% of GDP in FY25, and ongoing energy price swings strain government finances. Economists at ICRA expect India's industrial production growth (IIP) to slow significantly in March. Broader analyst forecasts for India's economic growth (GDP) in FY26-27 range from 6.4% to 7.2%, but these predictions are highly sensitive to sustained high oil prices.
Economic Outlook Tied to Energy Prices
India's economic path in the coming months will depend heavily on global energy prices and geopolitical stability. Although GDP growth forecasts remain strong, with the IMF predicting 6.5% for FY27 and Goldman Sachs forecasting 6.9% for 2026, these figures face significant risks if oil prices stay high. The Reserve Bank of India's monetary policy must balance supporting growth with controlling rising inflation, especially considering the ongoing conflict and potential El Niño weather patterns affecting food prices. Domestic demand will be tested as higher input costs lead to possible price increases for various consumer goods and services.