Whalesbook
India's economic growth is facing stronger headwinds than expected, largely due to the escalating West Asia conflict. The slowdown is becoming evident as manufacturing output and merchandise exports contracted in the January-March period.
Manufacturing Sector Weakens
The manufacturing sector's output growth eased to 5.1% in the last quarter of fiscal year 2026, down from 6.3% previously. Higher raw material costs, global supply chain issues linked to the West Asia crisis, and reliance on imported materials are key factors. Industries like refined petroleum, chemicals, and pharmaceuticals have been hit hard. Exports also declined by 2.8%.
Mixed Performance Across Sectors
While manufacturing struggled, other industrial sectors showed mixed results. Mining output increased due to higher coal and natural gas production, and electricity generation saw modest growth. The construction sector's performance was varied, with strong infrastructure goods output contrasting with rising bitumen prices impacting road projects.
Growth in the services sector is estimated to have moderated to about 8.5% in the last quarter of FY2026, from 9.5% in the prior quarter. Trade and transport showed slower expansion. Banks experienced pressure on profitability from bond losses due to rising yields, which climbed to 7.04% for the 10-year government security by March 2026.
Revised Growth Forecasts and Risks
The agricultural sector's GVA growth is projected at 2.1% for the last quarter of FY2026, though weather patterns pose a risk. ICRA has lowered its GDP growth forecast for FY2027 to 6.2% from 6.5%, assuming crude oil prices will average $95 per barrel. This revision highlights risks from geopolitical tensions, climate issues, and commodity price volatility.
Inflation and Monetary Policy Concerns
High crude oil prices from the West Asia conflict are likely to increase inflation by raising transportation and production costs. This complicates the Reserve Bank of India's efforts to balance economic growth and inflation control. The current account deficit could widen due to higher oil import costs, potentially weakening the rupee. Competitors like China also face inflation from energy shocks, though their diverse manufacturing may offer some buffer. Periods of geopolitical instability have historically led to volatility in emerging market currencies and assets.