West Asia Conflict Raises Cost Pressures and Supply Chain Risks Across Industries
Energy-Intensive Sectors Face Growing Challenges as Geopolitical Tensions Continue
Three months into the West Asia conflict, geopolitical tensions are exerting a deeper influence on India’s economy, with several industries facing higher costs and operational disruptions. While the impact varies across sectors, energy-intensive industries are experiencing the most significant pressure from rising input costs and supply chain constraints.
Three months after the onset of the West Asia conflict, the resulting geopolitical tensions are increasingly affecting India's economic landscape. The impact is uneven across sectors, with industries dependent on energy and imported inputs facing the greatest challenges.
Sectors such as aviation, refining, fertilizers and chemicals are encountering substantial pressure due to increased input costs and operational disruptions. Aviation, in particular, is dealing with higher aviation turbine fuel (ATF) prices, airspace restrictions and weaker demand conditions. Limited ability to pass on higher costs, combined with currency depreciation and rerouting inefficiencies, could affect profitability in FY27.
Raw material supply disruptions are also creating challenges for key feedstocks, leading to production constraints among select chemicals and petrochemical manufacturers. Limited pricing flexibility is affecting sales and margins across segments. In the fertilizer sector, elevated input costs and supply limitations involving ammonia and sulphur are putting pressure on margins, particularly for non-urea producers despite existing policy support mechanisms.
Ceramic tile exporters are also facing increased pressure from rising gas and fuel costs, which are reducing revenues and compressing margins. Industry assessments indicate that smaller players remain more exposed due to greater export dependence and a lower ability to absorb cost increases. While domestic demand continues to remain stable, exports to West Asia, accounting for 20 per cent of sales, have been affected. This has had a disproportionate impact on Morbi-based ceramic manufacturers that rely heavily on overseas markets.
The jewellery retail sector is experiencing challenges from elevated gold prices and duty hikes. Although supply conditions remain stable and businesses have been able to pass through costs effectively, higher working capital requirements and moderated sales volumes are influencing the market environment.
Several consumption-driven and export-oriented sectors are also facing moderate headwinds due to rising costs and changing demand conditions. Cement companies, for example, are experiencing margin pressure from higher input costs, including petcoke and diesel.
Moderately Impacted Sectors
Auto component manufacturers are encountering moderate pressure from rising raw material and fuel costs, though supply chains remain stable. Partial and delayed pass-through of higher costs is contributing to limited margin compression, while demand remains resilient despite inflationary pressures and export softness.
Tyre manufacturers are similarly facing margin challenges due to higher crude-linked input costs, constrained pricing flexibility, export disruptions and currency-related cost increases.
For automobile Original Equipment Manufacturers (OEMs), higher commodity, freight and fuel costs are likely to affect margins. Cost pass-through remains measured because of demand sensitivity in mass-market segments. Although supply chains currently remain broadly stable, any prolonged disruption could influence production planning and affordability-driven demand, particularly in the two-wheeler segment.
Quick Service Restaurant (QSR) operators are also facing moderate operational disruption arising from LPG shortages.
Sectors Showing Relative Stability
Some industries appear comparatively insulated from the current disruptions. Hospitality, pharmaceuticals, non-ferrous metals, textiles and cotton spinning continue to remain relatively protected due to diversified supply chains, stable access to raw materials, resilient domestic demand and favourable pricing conditions.
However, the broader outlook remains influenced by the sensitivity of financial sector profitability to asset quality. Rising economic stress could lead to higher non-performing assets, particularly among MSMEs and unsecured loan segments, which may affect bank profitability and credit growth.
According to the assessment, a significant moderation in India Inc’s current credit ratio is expected. The ratio, which measures rating upgrades relative to downgrades, could weaken after remaining buoyant over the last three to four years.
The writer is Chief Rating Officer, ICRA.