OECD Warns of West Asia-Linked Energy Shock Risk to India, Forecasts Slowing Growth to 6.3% in FY27

OECD Cuts India's Economic Growth Forecast

The Organisation for Economic Co-operation and Development (OECD) has reduced India's economic growth forecast to 6.3 percent in FY2026–27, citing higher oil and gas prices linked to West Asia tensions and gas rationing as major concerns. The OECD's Economic Outlook 2026 report, released on June 3, also projects growth at 6.4 percent in FY2027–28.

Despite some moderation, India's real gross domestic product (GDP) has remained resilient, expanding by 7.8 percent year-on-year in the quarter ended December FY2025–26, down from 8.4 percent in the previous quarter. However, high-frequency indicators suggest momentum is easing as higher food and energy costs reduce household purchasing power.

The OECD warned that India's heavy dependence on Middle East energy supplies could leave the economy vulnerable if disruptions intensify. India's crude oil imports accounted for around 46 percent of total imports in 2024, while natural gas imports accounted for about 57 percent.

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The OECD report said that more persistent energy rationing could lead to weaker growth, and persistent disruptions to energy supply, including prolonged gas rationing, could further constrain production and raise inflation, including through reduced fertiliser supply and agricultural output.

India's fiscal position is also expected to come under pressure as the government increases spending to cushion households from elevated fuel and fertiliser costs. The OECD said measures taken to offset higher energy costs are likely to widen the fiscal deficit by around 0.4 percentage points relative to the Budget path.

The Union Budget for FY2026–27 had projected a fiscal deficit of 4.3 percent of GDP. However, the OECD said fiscal policy is projected to become expansionary in FY2026–27 to cushion the impact of higher energy prices.

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The OECD also projected a temporary increase in interest rates as inflationary pressures re-emerge. In this context, a temporary increase in the policy rate of around 25 basis points is projected by the end of the first quarter of FY2026–27 to help maintain inflation within the 4 percent ± 2 percent target band and anchor expectations.

The OECD recommended a shift towards targeted assistance, direct transfers to vulnerable households and viable firms, which would achieve similar objectives at significantly lower fiscal cost. It also called for faster renewable energy deployment and stronger grid infrastructure to reduce reliance on imported fuel and improve energy security.