Three months into the Middle East conflict, the impact on the Indian economy has become most visible in energy-related sectors, wholesale prices and external trade, with rising input costs weighing on businesses and increasing upside risks to inflation.
The shock has affected output asymmetrically, with input costs rising sharply while companies across sectors have struggled to fully pass on higher costs to consumers, according to a report by Barclays. As a result, margin compression has emerged across large parts of India Inc even as aggregate output remains relatively stable.
Barclays said the impact has so far been concentrated in energy and energy-linked sectors. LPG consumption fell 13.1% year-on-year in April, marking the second consecutive month of decline, while fertiliser and chemical output showed signs of weakness amid natural gas shortages and supply constraints. Transportation activity has also softened, with higher energy and shipping costs affecting port cargo traffic and international airline passenger traffic.
Inflation pressures have primarily surfaced in wholesale prices. Crude petroleum wholesale inflation surged 67.2% year-on-year in April, while wholesale prices of chemicals, textiles and base metals accelerated between March and April. Barclays noted that retail fuel prices had remained largely unchanged through April, although the impact on consumer prices is expected to become more visible following fuel price increases from May onwards.
Trade flow changes
The report highlighted significant changes in India’s trade flows with the Middle East. Energy import volumes have declined sharply following disruptions around the Strait of Hormuz, with crude oil import volumes falling 34.1% year-on-year in April and petroleum product imports declining 26.2%. Exports of petroleum products have also weakened, although higher prices have partly supported export values.
Based on an analysis of earnings calls of more than 300 Indian companies, Barclays said the conflict has largely transmitted through higher input costs rather than widespread supply disruptions. Companies in energy, chemicals, fertilisers and metals have reported increases of between 25% and 100% in key input costs, while pass-through to customers has remained incomplete, leading to pressure on profitability.
Consumer-facing sectors have also faced cost pressures, with companies reporting volatility in raw material prices, including natural rubber, edible oils, cotton and metals. Some automobile and two-wheeler manufacturers experienced production disruptions linked to gas shortages and shipping delays, while discretionary spending in travel, hospitality and consumer electronics softened. However, domestic demand and premiumisation trends remained resilient across several categories.
Barclays said planned cost pass-through by companies, along with the possibility of additional fuel price increases, poses upside risks to its FY27 headline inflation forecast of 4.5%. At the same time, it maintained that the conflict appears to be a price shock rather than a growth shock, forecasting India’s real GDP growth at 6.8% in FY27 compared with an estimated 7.6% in FY26.
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