India's Economy: Export Surge Meets Domestic Strain as Oil Prices Climb

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AuthorIshaan Verma|Published at:
India's Economy: Export Surge Meets Domestic Strain as Oil Prices Climb
Overview

India's private sector activity in March grew at its slowest pace in over three years, per HSBC's PMI survey. Rising input costs, fueled by the Middle East conflict, weakened domestic demand. Manufacturing activity hit a 4.5-year low, and services growth also eased. Despite this, international orders reached a record high. However, companies are absorbing higher costs, squeezing profit margins and raising questions about the long-term strength of this export-driven growth.

Contrasting Economic Trends

March Purchasing Managers' Index (PMI) data shows a sharp contrast: India's domestic economic activity slowed significantly, while international orders reached record levels. This divergence, driven by global geopolitical events and imported inflation, creates a challenging outlook for Asia's third-largest economy as it faces rising costs and softening consumer sentiment.

Domestic Activity Slows

HSBC's India Composite PMI fell to 56.5 in March, its weakest private sector expansion in 18 months and the slowest overall pace in over three years. This slowdown happened unexpectedly, as forecasts anticipated little change from February's 58.9. The manufacturing sector was hit hardest, with its PMI dropping to 53.8, a 4.5-year low. Services activity also eased, its PMI falling to 57.2 from 58.1. This occurred as India finished its fiscal year, suggesting challenges for the new financial period. Amid this broad moderation, a record surge in international orders provided a positive note, with global new business reaching its highest level since September 2014.

Geopolitical Drag on Prices

The main reason for the domestic demand slump is rising prices linked to the Middle East conflict. Input costs, including oil, energy, food, and metals, increased at their fastest rate since June 2022. This surge is mainly due to higher oil prices, which have risen over 40% since the conflict began, pushing Brent crude near $104 a barrel. India imports about 90% of its crude and nearly half its natural gas, making it highly exposed to these global disruptions. Moody's warns a prolonged conflict could boost Brent crude prices by up to 64%, causing significant economic harm. This high inflation is forcing companies to absorb costs, reducing their profit margins. HSBC's chief India economist Pranjul Bhandari stated, "companies are absorbing part of the increase by squeezing margins." Broader wholesale price index (WPI) data shows inflation rose to 2.13% in February and is expected to reach a 21-month high of 3.2% in March, driven by commodity costs.

Export Surge Offers Relief

While domestic spending struggles with high inflation, India's export sector is showing strong performance. International orders have reached a record high, supported by demand from Asia, Europe, and the Americas. From April to February, total merchandise and service exports hit $790.86 billion, up 5.79% year-on-year, led by engineering goods, electronics, and chemicals. Services exports have been a key support, totaling $387.93 billion in the same period and contributing to a large surplus in services trade. This strong export performance is a major reason for higher GDP growth forecasts, with Fitch Ratings predicting 7.5% growth for FY26, though they note risks from global tensions and energy prices.

Sustainability Concerns Loom

However, the strong export figures mask underlying domestic challenges. Continuing high oil prices are a major risk, potentially pushing inflation significantly above current levels and slowing economic growth. Past oil shocks show how such events can boost inflation, hurt trade balances, and strain foreign reserves. The Indian rupee has already fallen to a record low against the US dollar, partly due to rising geopolitical tensions and oil prices. Analysts warn that a long Middle East crisis could hurt India's growth prospects due to high energy costs and supply chain problems. Prime Minister Modi has stated India's economy is strong with sufficient reserves. Yet, the combination of imported inflation, shrinking company profits, and a weaker currency creates a risky situation. The gap between strong exports and a strained domestic economy, along with volatile energy prices, raises serious questions about whether current growth can continue.

Future Outlook

Fitch Ratings raised India's GDP forecast for FY2025-26 to 7.5%. However, the agency expects growth to slow in later years, as rising inflation could limit consumer spending. India's central bank is cautious, and analysts expect interest rates to remain steady due to inflation worries and oil price swings. While India's economy has been resilient, the global situation, particularly the ongoing conflict and its impact on commodity prices, poses significant risks that could challenge even high growth forecasts.

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