Sushma Ramachandran

The global economy continues to face severe disruptions due to the US–Israel conflict with Iran, with crude oil prices once again crossing the $100-per-barrel mark. Iran’s blockade of the Strait of Hormuz has constrained the flow of oil and natural gas from West Asia. India, like the rest of the world, is feeling the impact, though it is widely regarded as more resilient than many other economies. Both the International Monetary Fund (IMF) and the World Bank have revised India’s growth estimates for 2026–27. The IMF now projects growth at 6.5 per cent, up from 6.4 per cent earlier, while the World Bank has raised its forecast from 6.3 per cent to 6.6 per cent.

In contrast, multilateral institutions expect the global economy to slow down due to the conflict. The IMF projects global growth at 3.4 per cent, while the World Bank has marginally lowered its estimate from 2.7 per cent to 2.6 per cent. Confidence in India’s relative resilience is reinforced by a Reuters poll of economists, which suggests that the country’s growth outlook remains broadly unchanged despite the West Asia crisis. However, the poll also cautions that headline GDP data may not fully capture the adverse effects on India’s vast informal sector, where the impact on jobs and small businesses is likely to be significant.

Evidence of stress in the informal economy is already visible. There are reports of workers migrating from manufacturing hubs back to their rural homes—not on the scale witnessed during the pandemic, but in a steady stream. A key driver appears to be the unaffordability of cooking gas in the open market. While registered domestic consumers have largely been shielded from supply and pricing disruptions, and industrial users are now receiving up to 70 per cent of their earlier allocations, migrant workers and others dependent on market-priced cylinders are struggling to afford basic cooking fuel.

Inflationary pressures are also building as higher import costs are passed on to consumers. Prices of essentials such as edible oils have begun to rise, while electronics, including smartphones reliant on imported components, are becoming more expensive. Fast-moving consumer goods, particularly durables like refrigerators and air conditioners, have already seen marginal price increases with the onset of summer.

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Retail inflation rose to 3.4 per cent in March from 3.2 per cent in February, driven largely by higher food prices and supply disruptions linked to the West Asia conflict. Although this remains within the Reserve Bank of India’s tolerance band, it signals the growing impact of external headwinds. The depreciation of the rupee against the dollar has compounded these pressures. From around 90–91 to the dollar in February, the currency briefly breached the 95 mark and is now hovering in the 93–94 range. The rupee has weakened faster than many emerging market currencies, reflecting multiple factors, including India’s dependence on imports for over 85 per cent of its fuel needs.

As a result, the current account deficit (CAD), estimated at around 0.8 per cent of GDP for 2025–26, could widen to 1.5 per cent in 2026–27. Ratings agency CRISIL has warned that the CAD could expand further to 2.0 per cent if oil prices remain in the $82–87 per barrel range during the fiscal year. Given current trends, such an outcome appears plausible—assuming the conflict subsides quickly. If it persists, average oil prices could rise significantly above these levels. At present, the Indian basket of crude is trading at around $108 per barrel.

The impact of the conflict is also evident in core industries. Official data for March shows core sector output slowing to a 19-month low of 0.4 per cent. Fertiliser production declined sharply by 24 per cent year-on-year, while crude oil output fell by 3.7 per cent and coal by 4 per cent. The drop in fertiliser output is directly linked to reduced natural gas supplies caused by the conflict. Although allocations have since improved, uncertainty remains, particularly given damage to gas infrastructure in Gulf countries such as Qatar, a major global supplier.

Against this backdrop, the Economic Survey’s projection of 6.8–7.2 per cent growth for 2026–27 may need to be moderated. A Reuters poll estimates growth at 6.7 per cent for the current fiscal year, while Japanese brokerage Nomura projects 6.8 per cent. Whether these projections hold will depend largely on the duration of the conflict. A swift resolution would provide significant relief, while a prolonged war could have far-reaching consequences for both the domestic and global economy.

It is also important to recognise that the Iran conflict is geographically closer to India than recent global crises, and is therefore likely to have a more immediate economic impact than events such as the pandemic or the Ukraine war.

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At the same time, the Indian economy continues to benefit from strong domestic demand, supported by recent tax cuts, lower tariffs on US exports, and a series of free trade agreements concluded over the past year. These factors provide important tailwinds, suggesting that India could still retain its position as the world’s fastest-growing major economy, even amid the headwinds of the West Asia crisis.