Sushma Ramachandran

India is likely to feel the ripple effects of continuing geopolitical tensions in the coming months. So far, the economy has shown considerable resilience, with the first quarter of FY27 recording robust growth of 7.8 per cent. The outlook for the rest of the year, however, may not be equally bright, given the multiple ways in which prolonged geopolitical tensions could affect industry, infrastructure and agriculture.

Inflationary pressures are also building, as higher metal and petrochemical prices are likely to be passed on to consumers. Pump prices of petroleum products may have been contained for the time being, but it may not be long before the sharp rise in international crude prices begins to affect domestic consumers. In other words, India, like the rest of the world, will have to contend with increasingly strong external headwinds.

The crux of the matter is the future course of the US-Iran war. When the conflict began in February, there was widespread optimism that it would be short-lived. That expectation appeared to have been borne out with the conclusion of a memorandum of understanding between the two sides in July. However, hostilities resumed almost immediately.

The situation has been further complicated by the entry of the Iran-backed Houthis from Yemen. Their attacks on Saudi Arabian vessels passing through the Bab el-Mandab Strait at the southern end of the Red Sea have created additional disruptions to global supply chains. This followed Iran's blockade of the Strait of Hormuz virtually from the outset of the war. The passage, which is a critical chokepoint for roughly one-fifth of global oil supplies, has remained severely disrupted since February, although traffic has gradually increased as vessels have been provided US naval escorts.

External Affairs Minister Dr S Jaishankar warning of impending global food crisis at a global event:

#WATCH | US | At a High-level meeting of Like-Minded Global South countries and Friends, EAM Dr S Jaishankar said, "First, we must not accept or legitimise choke points, be they in supply chains, finance, or connectivity. Second, energy security is at the heart of development. Availability and prices should not be manipulated for political edge. Third, food security is a common goal, and we must swiftly address challenges in that regard, particularly the supply of grains and fertilizers. Fourth, ensuring fair economic and trade practices that enhance our production capabilities and do not reduce us to be mere consumers. Our right to industrialise must not be denied. Five, the maritime commons must be secured, international law observed, and the safety and security of seafarers and commercial shipping guaranteed. Six, the transformation being brought about by artificial intelligence must not create new divides. And seven, the global south needs to be part of decision-making structures that deliberate on issues that directly pertain to our future..." (Video source: EAM/X)

— ANI (@ANI) September 23, 2026

The Houthis have now widened the conflict to Saudi Arabia, a close US ally. As a result, merchant vessels carrying cargo between Asian and European markets through the Bab el-Mandab and the Red Sea are increasingly taking the longer and more expensive route around the Cape of Good Hope. With about 12 per cent of global shipping normally passing through the Red Sea and the Suez Canal, the diversion is pushing up the prices of a wide range of goods. Similarly, the blockade of the Strait of Hormuz has slowed the movement of crude oil and petroleum products through the waterway.

These developments have roiled global oil markets, which have reacted to every twist and turn in the conflict. From initial highs of more than $100 a barrel, crude prices moderated to around $70-$75 after the Iran-US agreement raised hopes of an early end to the war. Prices firmed again after hostilities resumed. Currently, benchmark Brent crude is trading above $102 a barrel, while West Texas Intermediate is around $98.

Such oil prices represent a heavy burden for any emerging economy. For a country like India, which imports most of its fossil-fuel requirements, high crude prices translate into a sharp increase in the import bill. Official data shows that the cost of oil imports has already risen by more than 50 per cent during the first quarter, from April to June, even though import volumes have remained virtually unchanged.

Unless the war ends soon and oil prices begin to soften, the cost of crude imports is likely to continue rising in the coming months. Retail prices of petroleum products may consequently have to be increased, which could trigger a cascading inflationary effect across the economy.

Despite these concerns, supply-chain disruptions arising from global tensions have so far had no significant impact on the industrial sector. The latest data shows that industrial production rose by 8 per cent in August, compared with 7.4 per cent in July. It was also considerably higher than the 4.7 per cent growth recorded in the same month last year. The Index of Industrial Production (IIP) indicates that this strong performance was driven largely by manufacturing and electricity generation. Manufacturing grew by 9 per cent, while electricity generation increased by 13.3 per cent.

The data reinforces the view that the strong GDP growth recorded in the first quarter was not merely a flash in the pan. Despite a sharp rise in global commodity prices in recent months, the manufacturing sector continues to expand robustly. This is reassuring at a time when geopolitical tensions appear likely to persist indefinitely, despite efforts to reach a negotiated settlement.

Exports, both merchandise and services, have also risen significantly this year despite continuing global uncertainties. Merchandise exports have increased by about 15 per cent, while services exports have grown by around 13 per cent during the April-August 2027 period.

The rise in industrial output and the buoyancy in exports could help offset an expected weakness in the farm sector this year. Below-normal rainfall is likely to affect agricultural growth and rural demand. The El Niño phenomenon, associated with the warming of ocean waters, is one of the factors cited for the rainfall deficit, which was roughly 12-15 per cent below the average. According to reports from the India Meteorological Department, this is among the weakest monsoon outcomes in the past two decades, with more than 40 per cent of the country experiencing rainfall deficits. The likely consequence could be weaker rural demand in the coming months.

It is against this backdrop that the growth outlook for the rest of the current fiscal, 2026-27, needs to be assessed. Notably, several leading global institutions and ratings agencies have raised their growth projections for India following the economy's strong first-quarter performance, despite the continuing geopolitical turmoil.

The OECD and the Asian Development Bank have raised their forecasts to 7.1 per cent and 7 per cent, respectively. S&P Global Ratings and Moody's have also raised their projections to 7 per cent, from 6.6 per cent and 6 per cent earlier, citing the economy's resilience to global shocks. Fitch Ratings has likewise raised its estimate to 6.9 per cent from 6.4 per cent, pointing to stronger consumer demand.

The prospects for relatively high growth of around 7 per cent this year, therefore, remain positive despite continuing geopolitical tensions. With industrial output and exports showing strength and urban demand improving, the economy has demonstrated considerable resilience amid global disruptions.

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The key question is whether this resilience can be sustained if geopolitical tensions deepen rather than ease in the short term. The answer will depend partly on how policymakers manage the downside risks, particularly those arising from higher global oil prices and climate-related pressures on food supplies.