The Indian economy, once humming along with steady growth and benign inflation, is now facing a mounting cost due to the Iran war. As the world's third-largest oil importer and consumer, India's economy is highly exposed to the war's disruptions, particularly the blockade of the Strait of Hormuz, which affects a fifth of global oil and gas transit. This has led to a 53% jump in India's oil-and-gas import bill in April, prompting forecasts for a ballooning balance of payments (BoP) deficit. The Reserve Bank of India (RBI) has announced measures to contain the impact, but analysts warn that the broader drag on economic growth, inflation, and government finances will persist as long as oil prices remain elevated.
Michael Langham, an emerging markets economist, predicts a series of supply shocks for India. The country faces not only pressure on oil prices but also supply disruptions to fertilizers, which will impact key crops like wheat, especially with the looming El Niño weather phenomenon. The RBI's ability to manage these shocks is questioned, as the central bank governor, Sanjay Malhotra, previously described the economy as being in a "rare Goldilocks" phase. The Iran war has disrupted this outlook, with inflation levels rising and growth slipping.
The central bank now projects an average inflation rate of 5.1% in the financial year ending March 2027, up from 3.48% in April, and economic growth slipping to 6.6% from 7.7% in the previous year. Interest rate swap markets anticipate rate hikes, indicating a challenging macro picture. Sat Duhra, a portfolio manager, highlights the deeper structural challenges, including the impact on foreign direct investment, employment, manufacturing, consumption, and nominal GDP growth.
India's response to the crisis includes delaying retail fuel price hikes, keeping petrol and diesel prices relatively stable compared to other oil-importing countries in Asia. However, the government's strategy of not compensating fuel retailers for losses may reduce its financial firepower. The government's fiscal deficit target of 4.3% of GDP this financial year is expected to swell, with some economists predicting it could reach 5%.
The broader effects of the energy crisis will reverberate across the economy, according to India-based credit rating agency Crisil. Higher transport costs will push up both food and core inflation, impacting the agrarian economy that supports nearly half of the population. The government's fertiliser subsidy is likely to increase by 20% in 2026-27, and the government has also cut gasoline and gasoil taxes, forgoing significant monthly revenues.
In my opinion, the Iran war has exposed India's vulnerability to global oil market dynamics and the interconnected nature of its economy. The government's response, while necessary, may not be sufficient to mitigate the long-term effects of the crisis. The challenge lies in balancing immediate measures with long-term economic resilience, especially in the face of overlapping supply shocks and rising inflation. This raises a deeper question about India's ability to navigate global geopolitical tensions and their economic repercussions.
