A new report warns that the ongoing Middle East conflict could significantly erode India’s GDP growth and increase inflation, highlighting the nation’s vulnerability to global oil market disruptions.
Photograph: Bhawika Chhabra/Reuters
Key Points
- Prolonged Middle East conflict could reduce India’s real GDP growth by 1 percentage point.
- Retail inflation in India could rise by 1.5 percentage points if the Middle East conflict continues.
- Sectors like textiles, paints, and chemicals are likely to be directly impacted by the conflict.
- India’s dependence on crude oil and natural gas imports makes it vulnerable to external shocks.
- The Indian government may need to deploy countercyclical policies and augment the Economic Stabilization Fund to mitigate the impact.
India’s real GDP growth for the next fiscal could erode by around 1 percentage point, while retail inflation could rise by about 1.5 percentage points from their baseline estimates if the Middle East conflict persists through the next fiscal, an EY report said.
The EY Economy Watch report said that several sectors, including employment-intensive sectors like textiles, paints, chemicals, fertilizers, cement and tires, could be directly impacted.
Any reduction in employment or incomes in these sectors may further dampen aggregate demand.
As a result, both supply and demand conditions may be adversely affected by global oil market disturbances.
It said the Indian economy, which imports nearly 90 per cent of its crude oil requirements, is also highly dependent on imports of natural gas and fertilizers, and is particularly vulnerable to such external shocks, with the adverse effects likely to cascade across multiple sectors through strong forward and backward linkages with crude oil and energy.
The ongoing conflict in the Middle East has significantly disrupted global crude oil and energy markets by 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, it said.
“If the impact persists throughout FY27, we estimate that India’s real GDP growth could erode by around 1 percentage points, while CPI inflation could rise by approximately 1.5 percentage points from their baseline estimates of 7 per cent and 4 per cent respectively,” the EY Economy Watch report said.
EY in its February report had projected India’s GDP could to be between 6.8 and 7.2 per cent in the 2026-27 fiscal.
Government Response to Economic Challenges
In response, the Government of India may need to deploy a substantive countercyclical policy.
It may also be prudent for the GoI 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 GoI in FY26, EY said.
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 per cent since the United States and Israel launched military strikes against Iran on February 28, triggering sweeping retaliation from Tehran.
The Organisation for Economic Cooperation and Development (OECD) had last week projected India’s GDP growth to moderate to 6.1 per cent in the next fiscal, from 7.6 per cent in the current financial year.
