The country may need to reprioritise spending, support vulnerable businesses and households, and create fiscal space for strategic and long-term needs, Nageswaran said in the preface to the finance ministry’s monthly economic review for March.
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India’s relatively robust macroeconomic fundamentals and sustained policy efforts provide resilience, it needs to double down on its reform efforts to improve competitiveness and preparedness while remaining vigilant to the evolving situation, the review said. India has remained the world’s fastest-expanding major economy since 2021-22. Its growth rate for the current fiscal is estimated at 7.6%.
Given India’s position as a key energy importer with strong trade, investment and remittance linkages with West Asia, the impact of the conflict on India will be felt through four channels, Nageswaran said.
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These are supply disruptions to oil, gas and fertilisers, and exports; higher import prices; elevated logistics costs; and a possible drop in remittances by Indians in the Gulf countries.
It is prudent to assume a slow, gradual restoration of ‘business as usual’ in the Gulf rather than an accelerated one while firming up measures to cope with the external shocks, he suggested.
Near-term Outlook Uncertain
“It is always easier to call off preparations than to make them at the eleventh hour. It is also an opportunity for countries to structurally fortify themselves against future supply disruptions, whether manmade or natural,” the review said.
Data for March may not indicate the true magnitude of risks to the growth momentum, since businesses are trying to meet full-year targets. But April and May data could give a better handle on the likely growth rate for the next fiscal, Nageswaran said.
A sustained rise in global oil and gas prices could trigger second-round effects through higher input costs across sectors. “Nonetheless, the government remains vigilant, with measures underway to ensure adequate domestic energy availability and mitigate potential inflationary pressures,” the review said.
The near-term outlook remains uncertain, with external shocks posing downside risks to growth through higher costs and supply constraints, although domestic demand may offer some cushion.
“The government’s interventions across energy diversification, agricultural preparedness, inflation conditions, external sector strength, and policy measures support the economy’s ability to absorb near-term disruptions arising from global developments, while ongoing monitoring and calibrated responses remain important in view of evolving conditions,” the review said.
Elevated risks
Higher oil import bills, increased logistics costs and weaker exports to West Asia could widen the current account deficit. Remittances also remain at risk, with Gulf economies accounting for about 38% of India’s total remittances in FY24, or around $45 billion, and hosting nearly half of India’s migrants worldwide.
Alongside portfolio capital outflows, these factors have added pressure on the rupee, requiring calibrated policy responses. On the fiscal side, higher fertiliser and fuel subsidies and potential revenue shortfalls could widen the fiscal deficit, underscoring the need to prioritise expenditure.
The cumulative impact will operate through three channels: reduced output due to input and energy constraints; lower consumption amid higher prices and shortages; and weaker exports to affected regions.
In an uncertain global environment, the review said resilience will depend on strengthening domestic fundamentals.