Impact of West Asia war: India’s growth to suffer, says Chief Economic Advisor

New Delhi, Mar 29: In a significant remark amidst the raging West Asia war, the country’s Chief Economic Advisor V Anantha Nageswaran has said the GDP growth forecast of 7-7.4% for 2026-27 made by him on February 27 is going to have a “considerable downside”.

Significantly, a day after that forecast was made by the Ministry of Statistics based on 2022-23 as the base year, the war in West Asia commenced, with the US and Israel launching attacks on Iran.

“On the 27th February, we upgraded India’s growth estimate (at constant prices) for FY27 to a range of 7.0 per cent to 7.4 per cent. Clearly, there is considerable downside to this number,” the government’s top economic advisor wrote in the preface to the Finance Ministry’s Monthly Economic Review report for March released yesterday.

He said the data for March will not reveal much, since businesses are trying to meet full-year targets for FY26.

However, “high-frequency data for April and possibly May may give us a better handle on the likely growth rate for the new financial year,” he wrote.

“Similarly, the current account deficit too will widen significantly in FY27,” he added in the preface written two days before the government effected cut in the fuel excise duty.

The West Asia war has led to massive disruptions in the energy flows and the resultant sharp rise in global crude prices.

The average price of India’s crude oil basket jumped to $111.93/bbl in March from $69.01/bbl in February.

Earlier on March 2, Nageswaran told the Parliament’s Standing Committee on Finance that while the macro-economic impact on the Indian economy of global crude oil prices of up to $90 per barrel is “almost insignificant or not relevant”, prices staying elevated at $130/bbl for 2-3 quarters could push up headline retail inflation in 2026-27 to 5.5% and reduce GDP growth to 6.4%.

The sharp rise in energy prices and uncertainty related to the war led to a record exit of foreign capital from Indian financial markets – $13.3 billion so far in March. This has pushed the rupee to new lows every other day.

Since the war began, the Indian Rupee has weakened by more than 4% against the US dollar. On Friday, the Rupee closed at 94.81 per dollar.

Nageswaran also warned that the combined effect on domestic growth, inflation, and fiscal and external balances from the conflict is “likely to be significant” due to the four channels at play: i) supply disruptions to oil, gas, fertilisers, and exports, ii) higher import prices, iii) higher logistics costs, and iv) a possible decline in remittances by Indians in Gulf countries.

He also noted that even after the end of the war, the critical question would be how damaged the energy sites were and what it would take to restore normal supplies.

“For forecasting and planning purposes, therefore, it is prudent to assume a slow, gradual restoration of ‘business as usual’ in the Gulf rather than an accelerated one. It is always easier to call off preparations than to make them at the eleventh hour,” he said.

“Given the considerable impact of the conflict on India’s economy, we should leverage the fallout to redouble our recent reform efforts to enhance India’s competitiveness and preparedness. The ‘entrepreneurial mindset’ in bureaucracy (not making the ‘best’ the enemy of the ‘good’), accompanied by enhanced speed of decision-making, discussed in Chapter 16 of the Economic Survey, is precisely what is called for if India is to emerge from this episode stronger, more resilient and more competitive,” he said.

The government on March 27 announced a cut in the Special Additional Excise Duty (SAED) on petrol and diesel by Rs 10 per litre each to ease the strain on oil marketing companies’ (OMCs) finances due to the surge in global crude oil prices.

He said India will need to provide “immediate relief to the most affected and vulnerable businesses and households”.

At the same time, he said fiscal space will have to be generated to meet “strategic and long-term needs that this conflict has underscored”, including the need to build long-term buffers in several commodities and materials, not just energy-related ones.