The Finance Ministry has warned that the ongoing West Asia crisis could trigger a supply shock for the Indian economy and fuel inflation if disruptions in oil supplies persist, according to its monthly economic review for April.
The ministry said damage to oil and gas production and supply infrastructure in the Gulf region could take several months to repair.
It noted: “Repairing the damage to the oil and gas production/supply infrastructure in the Gulf region may take several months. If such a gradual recovery is not supported by a good kharif output (a weather shock /below normal monsoon as predicted by the IMD - possible El Nino conditions), it is likely that the price shock felt at the headline inflation might spill over to the core measure through the cost-push channel.”
The report said that if a delayed recovery in global oil supplies coincides with a weak kharif season due to below-normal monsoon conditions, inflationary pressures could intensify. The India Meteorological Department (IMD) has indicated the possibility of El Nino conditions, which may result in lower rainfall across several regions.
It added that India is entering FY2026-27 with strong domestic fundamentals but facing external challenges. The economy recorded real GDP growth of 7.6 per cent in the previous fiscal year, supporting a projected growth range of 7–7.4 per cent for the coming year.
However, the outlook has been clouded by uncertainty arising from the West Asia conflict.
The ministry observed that a supply shock is already visible, with rising prices and concerns over demand compression. Higher input costs, particularly in the petroleum sector, are expected to affect multiple industries.
It said inflation could shift towards a cost-push pattern as firms pass on higher costs to consumers to protect margins. Since many downstream sectors depend on petroleum products, the impact of elevated energy prices is expected to be widespread.
The report also cautioned that the conflict could disrupt trade and financial flows, even as India’s strong domestic demand, policy support, resilient financial system and sustained public investment provide some cushion against external shocks.
However, it said it remains uncertain whether these buffers will be sufficient if disruptions in energy and fertiliser supplies continue for an extended period.
It further flagged weather-related risks, noting that the expected El Nino conditions could lead to below-normal rainfall, potentially adding to inflationary pressures and widening fiscal and external deficits while also impacting economic growth.