New Delhi

The ongoing conflict in West Asia could shave around one percentage point off India's economic growth and push up inflation if the disruptions persist, according to a report by Ernst & Young.

The latest edition of the report, 'Economy Watch: Monitoring India's macro-fiscal performance', warned that prolonged geopolitical tensions could weigh on India's macroeconomic outlook through higher energy prices and supply disruptions.

"The ongoing conflict in the Middle East has significantly disrupted global crude oil and energy markets by affecting supply, storage, transportation and prices," the report said.

It added that if the impact of the conflict continues through the next fiscal year, India's growth trajectory could weaken while inflationary pressures could rise.

"If the impact persists throughout FY27, we estimate that 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 per cent and 4.0 per cent, respectively," the report stated.

The report noted that the risks arise at a time when India's economy is otherwise showing strong momentum.

"High-frequency indicators for January and February 2026 indicate an ongoing growth momentum. However, there are early signals of some moderation owing to the challenges posed by the ongoing geopolitical uncertainties," it said.

Highlighting the transmission channels of the shock, the report underlined India's vulnerability to global energy market disruptions.

"India, which imports nearly 90 per cent of its crude oil requirements, is also highly dependent on imports of natural gas and fertilizers. Consequently, the Indian economy is particularly vulnerable to such external shocks," it said.

It further cautioned that the impact could spill over across sectors, affecting both supply and demand conditions.

"Several sectors, including employment-intensive sectors like textiles, paints, chemicals, fertilizers, cement and tires, could be directly impacted... As a result, both supply and demand conditions may be adversely affected by global oil market disturbances," the report added.

The report also flagged early signs of softening private sector activity amid rising cost pressures.

"PMI manufacturing fell to a four-and-a-half-year low... while cost pressures intensified as reflected by input costs and selling charges that increased at the fastest rates in 45 and seven months respectively," it noted.

Given the evolving risks, the report suggested that policy support may be required to cushion the impact.

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"In response, the GoI may need to deploy a substantive countercyclical policy," it said, adding that additional fiscal provisions may be needed to manage volatility arising from global conditions.

Despite these headwinds, India is expected to remain among the fastest-growing major economies globally, although growth could moderate if geopolitical tensions persist, the report added.