MUMBAI: The ongoing crisis in the Middle East could weigh heavily on India’s economy if it drags on, potentially offsetting gains from recent trade deals with the US, the EU and other partners, according to analysts at BMI, a Fitch Group entity.
In a report released on Tuesday, BMI warned that uncertainty is likely to rise sharply from March due to the conflict, dampening investment sentiment in India. “We believe this will discourage investment, offsetting the positive effects from the trade deals on growth,” the analysts said.
The report flagged significant downside risks, particularly if Iran follows through on threats to shipping through the Strait of Hormuz. A full closure of the strategic waterway could directly shave up to 50 basis points off India’s GDP through higher energy transportation and import costs, BMI estimated.
At the same time, the agency noted potential upside risks. A new India-US trade deal and a recent ruling by the Supreme Court of the United States striking down former President Donald Trump’s reciprocal tariffs could provide a stronger-than-expected boost to growth. BMI said it is assessing India’s evolving geopolitical situation and will update its GDP forecasts after completing the review.
On domestic growth, the report observed that recent reforms — including income tax rebates and GST rate cuts — did not deliver the anticipated growth impulse. India’s Q3 GDP growth came in at 7.8%, the first reading under the revised base year of 2023. While this exceeded the consensus estimate of 7.2%, it fell short of BMI’s projection of 9.2%.
GST rate cuts announced in September played a key role in Q3 performance. Private consumption rose 8.1% year-on-year, contributing 4.9 percentage points to overall growth. However, BMI said consumption growth was weaker than suggested by vehicle registrations and other retail indicators during the quarter. This divergence, along with a simultaneous reduction in government spending, may have led to overestimation of GDP, the report noted.
Encouraged by industrial output data for the first two months of Q4, BMI has revised its FY26 growth forecast upward by 50 basis points to 7.9%, with Q4 growth projected at 8.7%.
“We are revising our FY26 growth forecast upwards by 50 bps to 7.9% on account of favourable industrial production data during the first two months of the current quarter. However, risks to our FY27 outlook have risen due to renewed hostilities in the Middle East as well as US tariff policy developments,” the analysts said.
Regarding the GDP base year revision, BMI said the updated methodology strengthens the measurement of informal sector activity and could result in higher reported growth in Q4.
Despite relatively favourable readings of policy uncertainty so far in 2026 — largely reflecting the completion of trade deals with the US and the EU, BMI has left its FY27 growth outlook unchanged. It cautioned that escalating geopolitical tensions could erode investor confidence and dilute the benefits of recent trade agreements.