A supply shock accompanied by demand compression amid high prices and slowing activity may weigh on India’s FY27 economic growth, Finance Ministry economists said on Wednesday, underlining the severe impact of the West Asia conflict.
They said even sixty days after the war began on February 28, there’s still more haze than visibility on the duration for which energy supplies will remain disrupted.
“In the presence of pervasive uncertainty and distrust, it does not make sense to assume the best, as stock market investors seem to be doing,” according to the ministry’s monthly economic report for April.
This signifies a candid official acknowledgement of the direct impact of the war on the Indian economy, and an assessment that significant damage has already been done, while the uncertainty is still refusing to go away.
The outgoing fiscal year delivered real GDP growth of 7.6%, the strongest in recent years, encouraging a 7-7.4% forecast for the current financial year, only to be clouded by an altered macro-outlook in the wake of the West Asia war, it said. However, the outlook has not been revised for now. “A ‘supply shock’ is apparent in the economy. An accompanying demand compression is a serious concern, given high prices, rising inflation, and a reduced pace of economic activity,” it said.
The ministry’s economists said inflation may become cost-push as businesses/producers pass on their increased input costs to protect their profit margins.
“A wide spectrum of downstream industries relies directly on the petroleum sector, and it is likely that input cost pressures will be felt widely across the economy,” the report noted.
To temper cost pressures in critical sectors like agriculture, the Centre has taken various measures such as increased allocation of natural gas to fertiliser production, waiver of customs duty and around a 12% increase in nutrient-based subsidy for the upcoming kharif season. Beyond the production structures, the conflict has seriously dented investors’ confidence, disproportionately affecting EMDEs, including India.
“The consequent weakening of the rupee is another pressure point for domestic inflation, as that could raise import prices,” it said.
Some countries have begun to allow prices to be passed on to end-users – households and businesses. Some are yet to do so, it said. But it is inevitable. During a period of supply disruption, demand has to moderate; failing that, countries will have to pay a much higher price for energy supplies. India’s crude oil basket averaged $113 per barrel in March, and it is just under USD 115 per barrel for April until the 24th.
Policy circles say crises should not be wasted, and India’s current challenge is no different. The priority must be energy security, stronger public transport, and reduced import vulnerabilities. Simultaneously, deregulation and simpler trade rules can lower business costs. Agriculture reforms are urgent, especially with a below-normal and uneven monsoon forecast.
India must also promote AI-resilient trade skills among youth to boost jobs and exports. Tax certainty is critical to attract investment, as trade and current account deficits may widen further in FY27. With global supply chains and capital flows weaponised, India must compete harder for investment and growth.
For most economies, the current global drift is a source of vulnerability. However, for India, with its strong domestic fundamentals and tradition of strategic autonomy, it can be an opportunity, it added.