Indian Economy: The fog of war

The turbulence triggered by higher tariffs levied by the United States last year did not significantly impact global macroeconomic conditions.

The West Asia conflict that began late February is proving to be different.

Forecasters are already revising growth projections downward and inflation estimates upward. This trend may persist if the conflict expands in scale and duration.

The disruption extends beyond oil and gas price spikes. Freight costs have risen, supply chains are curtailed, uncertainties have soared. The risks to oil and non-oil trade and fiscal balances have surged. Some 40% of remittances to India originate from West Asia, making it a key area.

The conflict, thus, has the potential to morph into a polycrisis.

Driven by rising demand, India’s dependence on energy imports has grown over time. While there have been efforts to derisk supplies—Prime Minister Modi told Parliament on March 25, that crude is sourced from over 41 countries now—the volume of gas from West Asia has risen.

This heightens India’s vulnerability to price increases and supply disruptions, resulting in lower energy availability at higher costs.

Compounding the issue, the price of the Indian crude basket (a mix of Oman and Dubai sour grade and Brent dated sweet grade crude) has risen much faster than Brent, and the Russian discount on oil has disappeared.

While consumers are somewhat protected at this juncture, thanks to prioritized domestic cooking gas supply and unchanged petrol and diesel prices, costs are ascending for all manner of industries.

Many petroleum products have prices that adjust in line with global rates and currency depreciation is further increasing the cost of imported inputs. If the crisis continues, these factors will impose fiscal burdens and negatively affect manufacturing.

Damaged energy infrastructure in the region will take a long time to recover, implying reduced supply for a while even if the conflict ends immediately. In the aftermath, energy-dependent countries are likely to intensify efforts to reduce import dependence by diversifying sources and maximizing use of domestic resources—coal, in India’s case.

Our base case forecasts for India’s growth in fiscal 2027 is 7.1% and 4.3% for retail inflation, assuming crude oil averages $75-80 per barrel for the year. But the risks today are tilted to the downside and are rising at this juncture.

The Monetary Policy Committee of the Reserve Bank of India is expected to hold policy rates steady and maintain its neutral stance during its review meeting in April.