A prolonged escalation in the Middle East conflict is emerging as a fresh risk for India’s economic outlook, with a new report warning of slower growth and rising inflation if disruptions continue into the next fiscal year. India’s real GDP growth could take a hit of nearly one percentage point in FY27 if the ongoing conflict persists, according to the latest EY Economy Watch report.
The report also flagged a likely surge in retail inflation, estimating an increase of about 1.5 percentage points over baseline projections.
“If the impact persists throughout FY27, we estimate that India’s real GDP growth could erode by around 1 percentage points, while CPI inflation could rise by approximately 1.5 percentage points from their baseline estimates of 7 per cent and 4 per cent respectively,” the EY Economy Watch report said.
EY had earlier projected India’s growth for FY27 in the range of 6.8 to 7.2 per cent, suggesting that sustained geopolitical tensions could significantly dent momentum.
Key Sectors Face Direct Impact
The report highlighted that multiple industries are likely to feel the immediate pressure of rising energy costs and supply disruptions. Employment-heavy sectors such as textiles, chemicals, fertilisers, cement, paints, and tyres are among those most exposed.
Any slowdown in these segments could translate into weaker job creation and reduced incomes, which in turn may hit overall consumption demand. The dual impact on supply chains and consumer spending could amplify the broader economic slowdown.
India’s heavy reliance on energy imports adds to its vulnerability. The country imports nearly 90 per cent of its crude oil needs, along with significant volumes of natural gas and fertilisers. This dependence makes it particularly sensitive to volatility in global energy markets.
Global Disruptions May Take Time To Ease
The Middle East conflict has already disrupted global crude oil supply chains, affecting storage, transportation, and pricing dynamics. The report cautioned that even if tensions ease in the near term, restoring normalcy in energy markets may take time.
Crude prices have surged sharply, rising nearly 50 per cent since February 28, when the United States and Israel launched strikes against Iran, prompting retaliatory action from Tehran.
Policy Response May Be Needed
To cushion the impact, the report suggested that the Government of India may need to adopt countercyclical measures. It also recommended greater coordination with industrialised states to stabilise economic activity.
EY noted that additional allocations could be considered for the Economic Stabilization Fund, which was introduced in FY26 as a buffer against global shocks. The government has already earmarked Rs 1 lakh crore under this fund.
Separately, the Organisation for Economic Cooperation and Development has projected India’s growth to moderate to 6.1 per cent in the next fiscal, compared to 7.6 per cent in the current year, underlining growing global concerns over economic headwinds.
