India's GDP Growth Forecast Under Threat from Prolonged Middle East Conflict

India's Economy at Risk: Middle East Conflict Could Erode Growth and Fuel Inflation

A recent report by EY, the global professional services firm, has warned that the ongoing conflict in the Middle East could have a significant impact on India's economy. The report, titled EY Economy Watch, estimates that India's real GDP growth could erode by around 1 percentage point, while retail inflation could rise by about 1.5 percentage points from their baseline estimates if the conflict persists through the next fiscal.

The report notes that several sectors, including employment-intensive sectors such as textiles, paints, chemicals, fertilizers, cement, and tires, could be directly impacted by the conflict. Any reduction in employment or incomes in these sectors may further dampen aggregate demand, leading to a decline in both supply and demand conditions. India's economy is highly dependent on imports of crude oil, natural gas, and fertilizers, making it particularly vulnerable to external shocks.

The conflict in the Middle East has significantly disrupted global crude oil and energy markets, affecting supply, storage, transportation, and prices. Even if the conflict is resolved in the near term, some of these disruptions may take considerable time to normalise. India, which imports nearly 90% of its crude oil requirements, is likely to be heavily impacted by these disruptions.

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According to the report, if the impact persists throughout FY27, India's real GDP growth could erode by around 1 percentage point, while CPI inflation could rise by approximately 1.5 percentage points from their baseline estimates of 7% and 4% respectively.

In its February report, EY had projected India's GDP to be between 6.8 and 7.2% in the 2026-27 fiscal. However, the latest projections from the Organisation for Economic Cooperation and Development (OECD) suggest that India's GDP growth may moderate to 6.1% in the next fiscal, from 7.6% in the current financial year.

In response to the potential risks, the Government of India may need to deploy a substantive countercyclical policy. It may also be prudent for the government to co-opt larger and more industrialised states into this countercyclical effort. Additional provisions may be made to augment the Economic Stabilization Fund (ESF) introduced by the government in FY26.

The government has already set up a Rs 1-lakh crore ESF to act as a financial buffer against global headwinds. Global crude prices have risen by almost 50% since the United States and Israel launched military strikes against Iran on February 28, triggering sweeping retaliation from Tehran.

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