India's Economic Growth Outlook Remains Stable Despite Informal Sector Challenges: Reuters Poll Indicators

India's Economic Growth Outlook Remains Stable Despite U.S.-Israeli War with Iran

India's economic growth outlook is broadly unchanged despite the ongoing conflict between the U.S. and Israel with Iran, according to a recent Reuters poll of 54 economists. The poll, conducted from April 20-27, found that the country's gross domestic product (GDP) is expected to grow 6.7% this fiscal year, in line with the March forecast.

This growth rate represents a slight slowdown from the 7.0% predicted for the year to March 31, 2026. Forecasts for fiscal 2026-27 ranged from 5.9% to 7.5%, while growth was expected to edge up to 6.8% in 2027-28.

The extent of the stress caused by the conflict on India's economy is difficult to gauge due to limited real-time figures on fuel costs, jobs, demand, and small businesses. However, anecdotal evidence suggests that the informal sector, which accounts for almost half of official GDP readings, is already feeling the strain.

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In cities, where roughly 60% of GDP is generated, many restaurants and hotels have been forced to reduce operating hours, cut menus, or switch to alternative fuels like firewood due to the disruption of supplies of liquefied petroleum gas. India's new GDP series has increased data inputs in an attempt to better capture the informal economy, but economists say more needs to be done to get a clear picture.

The informal segment is expected to be the worst hit by the conflict, with its ability to absorb shocks being very low. This could lead to a ripple effect on jobs and demand, which would play out if the problem persists beyond the near term.

Inflation is expected to average 4.5% this fiscal year, within the Reserve Bank of India's 2%-6% target range but more than double last year's pace. The RBI is expected to keep interest rates on hold until end-2027.

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Economists have warned that a prolonged Middle East conflict would hurt public finances and could force a shift in spending away from capital expenditure, a main growth driver amid weak private investment. Aditya Vyas, chief economist at STCI Primary Dealer Limited, said that the outlook appears too uncertain for a sudden pick-up in investment that has been lacking for many years.

"If push comes to shove, there could be a situation where a material diversion of funds from capital expenditure to subsidies happens. Price pressures are imminent and will in the medium term affect the fiscal front," Vyas said.

Yes Bank Chief Economist Indranil Pan said that the disruption to the informal sector would not be captured very significantly by the country's GDP reading, which is why the GDP forecast has not been changed at this point in time.