It’s one battle after another for the Indian economy.
If tariff-related uncertainties threatened to reduce national output in FY26, the ongoing Iran war seems to be actually dragging down economic activity as we speak.
Sensing the underlying damage, several forecasters have revised India’s growth projections downwards to a range of 5.9%–6.7% for FY27.
The sharpest correction came from Goldman Sachs, which reduced India’s real GDP growth forecast to 5.9% for calendar year 2026, as against its pre-Iran war prediction of 7%. Moody’s Ratings isn’t far behind, slashing FY27 forecasts to 6% from 6.8% earlier, citing weaker private consumption amid higher energy prices due to the ongoing West Asia conflict.
The forecast is lower than the RBI’s projection of 6.9%, amid concerns over oil prices and supply chain disruptions. Moody’s report, released this week, also emphasised the likely twin deficit problem. Rising global energy prices may widen India’s trade deficit, while disruptions in Gulf Cooperation Council economies could hurt remittance inflows, adding pressure on the current account deficit, it noted.
Underscoring that the West Asia situation is adding strain on production networks and supply chains, Moody’s observed that India’s over-dependence on Middle Eastern oil and gas imports raises near-term supply-disruption risks. However, strategic petroleum reserves and commercial inventories will mitigate economic disruption over the next few months.
Further, according to Moody’s, inflationary pressures and external account balances could deteriorate if the situation continues, while oil marketing companies and energy-intensive sectors such as cement, chemicals, and aviation may face margin pressure due to a limited ability to pass on higher input costs.
But despite these challenges, it believes India’s external position remains steady, supported by robust foreign exchange reserves, low external debt, and limited reliance on external financing.
Analysts at Standard Chartered also lowered their FY27 GDP growth forecast to 6.4% from 7%, and to 7.3% from 7.6% for FY26, while raising FY27 inflation estimates to 4.7% from 4.1%. The latter is largely due to rising crude oil prices, which it expects to average $90–$95 per barrel.
More than the revision in forecasts, the worrisome factor is the likelihood of a prolonged period of elevated energy prices and its impact on the external sector. For now, however, it maintains that the RBI will likely retain a status quo on rates in the near term, though it does not rule out the risk of a 25–50 bps repo rate hike if global crude oil prices shoot past $100 per barrel, putting further pressure on the rupee.
As the RBI explained earlier, every 10% increase in crude oil prices versus the baseline scenario reduces growth by 15 bps. How? Higher energy prices reduce purchasing power, which in turn has a cascading effect on overall economic activity. Take cooking gas, for instance. Hotels and restaurants alone contribute about 1% of gross value added, and so the actual impact of recent supply shortages on manufacturing and services sector activity will be known in the coming weeks.
While the increase in energy prices has been limited to cooking gas and aviation turbine fuel prices for now, analysts aren’t ruling out an increase in retail fuel prices in May or June, before a partial rollback later when global crude oil prices correct.
Moreover, according to Standard Chartered, the current account deficit will likely widen as exports—especially to the Middle East—could be adversely impacted due to the closure of the Strait of Hormuz. It is important to note that an estimated 14% of India’s exports are to the Middle East.
The government’s Chief Economic Advisor, V. Anantha Nageswaran, also weighed in, warning of “considerable downside” to the FY27 GDP growth forecast of 7–7.4%. This is rare for Nageswaran, who often sticks to estimates given in the Economic Survey throughout the fiscal. This time, however, is different, and he hinted at a likely downward revision to initial forecasts owing to the Middle East conflict.
“On 27 February, we upgraded India’s growth estimate (at constant prices) for FY27 to a range of 7.0% to 7.4%. Clearly, there is considerable downside to this number,” Nageswaran wrote in the preface to the finance ministry’s Monthly Economic Review report released recently. He added that fiscal space must be generated to meet strategic and long-term needs the West Asia conflict has underscored, such as the need to build long-term buffers in several commodities and materials, not just energy-related ones.
The World Bank, in its South Asia Economic Update, also projected India’s growth to decelerate to 6.6% in FY27. Warning that tensions in West Asia could weigh on growth, it noted that India faces significant risks due to high energy prices, although adequate foreign exchange buffers and a well-capitalised banking system could help mitigate the overall impact.
Citing improved private consumption, partly due to GST reforms, it noted that the economy accelerated from 7.1% in FY25 to 7.6% in FY26. While GST reductions may support consumer spending in the first half of FY27, elevated global energy prices may limit disposable incomes. Government consumption is also expected to ease due to higher fuel and fertiliser subsidies, while investment growth could moderate amid rising input costs and uncertainty.
As for the current account deficit, FY27 may see an increase to 1.8% of GDP due to a higher energy import bill, while the general government fiscal deficit (centre and states combined) is projected to increase marginally to 7.6% of GDP versus 7.3%.
In a landscape dominated by growth downgrades, the IMF stands out as an outlier, upgrading India’s growth projections for the current fiscal. In its April World Economic Outlook report titled Global Economy in the Shadow of War, the multilateral agency revised the FY27 GDP forecast to 6.5% from 6.1% projected in January. In contrast, it hinted that the global economy could enter a recession if the ongoing Middle East conflict persists longer than initial estimates.
Interestingly, the IMF also revised FY26 estimates upward by 1% to 7.6%, owing to a better-than-expected outturn in Q2 and Q3. Further, it noted that India’s growth will likely hold steady at 6.5% in FY28 as well, citing strong carryover momentum from FY26, a reduction in US tariffs on Indian goods from 50% to 10%, and sustained domestic demand strength.
“For 2026, growth is revised upward moderately by 0.3 percentage point (0.1 percentage point relative to January) to 6.5%, led by positive contributions from the carryover of the strong 2025 outturn and the decline in additional US tariffs on Indian goods from 50% to 10%, which outweigh the adverse impact of the West Asia conflict. Growth is projected to stay at 6.5% in 2027,” it reasoned.
At the global level, however, the outlook isn’t as rosy.
The West Asia conflict, which has disrupted approximately 13% of global daily oil supply and 20% of LNG flows through the Strait of Hormuz, is affecting growth across emerging markets and pushing inflation higher. As IMF Managing Director Kristalina Georgieva noted, even the most optimistic scenario now involves a growth downgrade, given infrastructure damage and supply disruptions.
On the other hand, global inflation is expected to increase from 4.1% in 2025 to 4.4% in 2026 before falling back to 3.7% in 2027. This is a 0.7 percentage point upward revision for 2026 from the figure in the October 2025 WEO, reflecting higher energy and food prices.
