Private sector companies in India became less optimistic towards the year-ahead outlook for output and profitability than they were prior to the outbreak of the Middle East conflict, according to a private survey released Friday. While companies scaled back hiring plans, they remained upbeat about capital expenditure and research and development (R&D) spending.

Business confidence weakened as firms flagged mounting pressure on profit margins. Respondents expected higher costs for fuel, energy, raw materials, transportation and wages, but said intense competition and price-sensitive customers would limit their ability to pass on these increases.

Companies also cited expectations of softer demand, volatile commodity prices and currency movements, as well as uncertainty around government policies and taxation. Some respondents pointed to the additional costs associated with transitioning to greener products and processes, including eco-friendly packaging and compliance with stricter environmental regulations.

The HSBC India Business Outlook survey, compiled by S&P Global, showed that the net balance of firms expecting higher business activity over the next 12 months fell to 22% in June from 35% in February, the weakest level of optimism since October 2023.

Business optimism declined in nine other economies compared with pre-conflict readings, improving only in Spain and the United States.

“Optimism among India’s private-sector firms about business activity and profitability fell to their lowest levels in nearly three years, weighed down by global uncertainty,” said Pranjul Bhandari, chief India economist at HSBC.

Although firms continued to expect profits to grow over the next year, confidence in profitability eased to its lowest level in nearly three years. Even so, India's profitability net balance of 15% remained well above the emerging market average of 5% and the global average of 9%, the survey noted.

In contrast, investment intentions strengthened. The net balance for capital expenditure rose to 19% in June from 17% in February, while planned R&D spending climbed to 12% from 5%, exceeding global averages on both measures.

Survey respondents attributed their investment plans to new product launches, rising demand for digital transformation and AI-led solutions. Planned capital expenditure included opening new branches, expanding production capacity, purchasing equipment, adopting software and entering new geographies.

Hiring expectations, however, moderated. The share of firms expecting to increase employment exceeded those anticipating reductions by a net balance of 10%, down from 17% in February. Companies linked the softer hiring outlook to weaker earnings expectations and rising cost pressures. Despite the slowdown, India's employment outlook remained stronger than the global average.

“While hiring plans softened in both services and manufacturing, manufacturers remained relatively more upbeat than their services counterparts,” said Bhandari.

The survey also showed that expectations for non-staff cost inflation rose to their highest level since October 2024. However, at a net balance of 9% in June, India remained among the least concerned globally about non-staff cost pressures, with only mainland China (+7%) and Russia (+3%) reporting lower readings.

Expectations for non-staff cost inflation were broadly similar across manufacturers (+9%) and service providers (+10%). Meanwhile, net balances for staff costs and output prices eased to 12% and 15%, respectively.

“At the composite level, expectations for non-staff costs rose, while staff-cost expectations dropped sharply, driven by service providers,” said Bhandari.