West Asia Conflict Dents India's FY27 Growth Prospects
Economists Lower Growth Estimates for FY27 Amid Ongoing West Asian Conflict
The ongoing war in West Asia has led economists to revise their growth estimates for FY27, with many projecting a decline in growth rates due to rising inflationary pressures and subsequent lower consumption and exports. According to QuantEco Research, economists have lowered their growth estimates by 20-60 basis points (bps) due to the conflict.
The conflict has led to increased input costs, which in turn has reduced the competitiveness of exports. Additionally, inflation directly impacts consumption, pulling down growth. Vivek Kumar, Economist at QuantEco Research, projects a growth rate of 6-6.2 percent in FY27 if the price of crude oil averages over $100/bbl. In a pre-war scenario, where crude oil had averaged $66/bbl, growth could have come in at 6.6-6.8 percent.
The finance ministry's Monthly Economic Report (MER) for March noted that there is "considerable downside" to its growth estimate of 7-7.4 percent for FY26. The MER also highlighted that the trade deficit will rise significantly in FY27, widening the current account deficit. To keep it manageable, burden-sharing between the government, households, and businesses will be required.
| Institution | FY26 Growth Estimate | FY27 Growth Estimate (Pre-War Scenario) | FY27 Growth Estimate (Post-War Scenario) |
|---|---|---|---|
| QuantEco Research | - | 6.6-6.8% | 6-6.2% |
| RBL Bank | - | 7% | 7% (20 bps lower) |
| Barclays | - | - | 6-6.2% (assuming oil price average $100/bbl) |
| IDFC FIRST Bank | - | 6.9-7% | 6.9-7% (50 bps lower) |
Even if there is de-escalation of the West Asian conflict at this point, a pre-war scenario in terms of crude oil prices is not anticipated. Energy shortages will persist, but at lower levels. Inflation risks are high, and therefore the RBI will have to hike interest rates at some point. Anitha Rangan, Chief Economist at RBL Bank, sees growth at 7 percent in FY27, 20 bps lower than its pre-war estimate.
The government has limited fiscal space to support growth through capex, due to higher fertilizer bills and excise duty cuts. Divestment will also be challenging in these market conditions, curtailing possibilities of additional revenue generation.
The Centre's ability to spend on supporting growth is further strained due to the revenue loss due to excise duty cuts, which is likely to be over Rs 1.4 lakh crore. According to ICRA, GDP growth is estimated at 6.5 percent in FY27, compared to 7.5 percent in FY26, reflecting the effect of elevated crude oil prices and concerns around energy availability.
Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data
Investor Takeaway
Investors should be cautious of the potential impact of the West Asia conflict on India's growth prospects.
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