The conflict, which began a month ago following U.S. and Israeli strikes on Iran, has disrupted a key global shipping route that carries nearly 20% of the world’s oil. This has driven up energy and freight costs while putting additional strain on supply chains.
High-frequency data for April, and possibly May, should provide a clearer picture of growth prospects for the new financial year, chief economic adviser V Anantha Nageswaran wrote in the report.
He said the current account deficit, which has already widened to 1.3% of GDP in the Oct-Dec quarter of the current fiscal year, will significantly worsen the next fiscal year.
India will need to provide immediate, targeted relief to the most affected and vulnerable businesses and households, the report said.
Domestic demand has remained relatively stable so far, but risks to growth are rising, particularly in sectors reliant on imported inputs.
Rising pressure for Indian economy
India’s economic outlook is under increasing pressure from the West Asia conflict, with economists warning of a 50-60 basis point hit to FY27 growth, reported ET. Ratings agency ICRA has lowered its FY27 growth forecast to 6.5% from 7.1%, assuming average crude price of $85 per barrel in the year against an earlier estimate of $70-75. HDFC Bank has revised its projection to 6.5-7% from 7.2%, while IDFC First Bank brought it down to 6.9-7% from 7.5%
India imports more than 85% of its crude oil requirements, with about half of it coming from the Gulf region, passing through the Strait of Hormuz, where vessel traffic is severely disrupted due to the war.
The Organisation for Economic Cooperation and Development (OECD) on Thursday lowered India’s FY27 growth forecast to 6.1% from 6.2%, citing global uncertainty. Official estimates peg India’s FY26 gross domestic product (GDP) growth at 7.6%.
The MPC is set to meet early next week, after keeping the benchmark repo rate steady at 5.25% in February. The war has driven up prices across a wide range of raw materials, increasing the likelihood of higher inflation. The input price index reached a near four-year high of 59.2 in March, according to S&P Global Market Intelligence data.
Economists expect wholesale and retail inflation to average around 4-5% each in FY27. Wholesale inflation rose 2.13% in February, while retail inflation stood at 3.21%. Gaura Sengupta, chief economist at IDFC First Bank, said the real impact would be on the first quarter of FY27 if the conflict persists, as domestic inventories run down, and supply disruptions become visible.
If disruptions extend beyond a quarter, DBS Bank estimates a 50-basis point downside risk to its 7% forecast for FY27.