Gulf conflict puts India's FY27 growth at risk

India's economic outlook is under increasing pressure from the West Asia conflict, with economists warning of a 50-60 basis point hit to FY27 growth.

Elevated crude prices, supply disruptions and rising commodity costs are weighing on the country's macroeconomic stability, with sectors such as chemicals, steel, cement, textiles, paints, tyres, airlines, processed food, hospitality and fertilisers expected to be among the worst affected.

Ratings agency ICRA has lowered its FY27 growth forecast to 6.5% from 7.1%, assuming average crude price of $85 per barrel in the year against an earlier estimate of $70-75. HDFC Bank has revised its projection to 6.5-7% from 7.2%, while IDFC First Bank brought it down to 6.9-7% from 7.5%.


"Prolonged West Asia crisis could impact the Indian economy through multiple channels," said Rajani Sinha, chief economist at CareEdge Ratings, adding if global crude prices average $100 per barrel, GDP growth could moderate to 6.6% in FY27.

India imports more than 85% of its crude oil requirements, with about half of it coming from the Gulf region, passing through the Strait of Hormuz, where vessel traffic is severely disrupted due to the war.

While a short-term disruption may have limited effects, economists warn that a sustained escalation could significantly alter India's growth and inflation trajectory in FY27.

The Organisation for Economic Cooperation and Development (OECD) on Thursday lowered India's FY27 growth forecast to 6.1% from 6.2%, citing global uncertainty.

Official estimates peg India's FY26 gross domestic product (GDP) growth at 7.6%.

Aastha Gudwani, India chief economist at Barclays, said if markets anticipate supply disruptions lasting four to six weeks, Brent crude could rise to $100 per barrel, putting further pressure on macro variables and potentially prompting the Reserve Bank on India's monetary policy committee (MPC) to consider an earlier than expected policy rate hike.

The MPC is set to meet early next week, after keeping the benchmark repo rate steady at 5.25% in February.

The war has driven up prices across a wide range of raw materials, increasing the likelihood of higher inflation. The input price index reached a near four-year high of 59.2 in March, according to S&P Global Market Intelligence data.

Economists expect wholesale and retail inflation to average around 4-5% each in FY27. Wholesale inflation rose 2.13% in February, while retail inflation stood at 3.21%.

Gaura Sengupta, chief economist at IDFC First Bank, said the real impact would be on the first quarter of FY27 if the conflict persists, as domestic inventories run down, and supply disruptions become visible. "It could shave off up to 50 basis points from GDP growth," she said, highlighting that restarting disrupted oil and gas production facilities could take months even after the conflict ends.

Radhika Rao, executive director and senior economist at DBS Bank, expects oil market volatility to continue for one to two quarters, which could feed into inflation expectations and dampen investor confidence. If disruptions extend beyond a quarter, DBS Bank estimates a 50-basis point downside risk to its 7% forecast for FY27.