Rising oil prices, higher fertiliser costs and supply disruptions linked to the Iran war are beginning to cloud India’s economic outlook, with economists warning that prolonged tensions could push up inflation, slow growth and strain government finances.India, the world’s third-largest oil importer and consumer, imports about 90% of its crude oil requirements, making it among the economies most exposed to disruptions stemming from the conflict and the effective blockade of the Strait of Hormuz, through which nearly a fifth of global oil and gas supplies pass.While the government and the Reserve Bank of India (RBI) have announced a series of measures to support the rupee and foreign exchange reserves, analysts say the broader economic costs will continue to rise as long as oil prices remain elevated.“India is set for a series of supply shocks,” Michael Langham, emerging markets economist at Aberdeen Investments, said, news agency Reuters quoted.Apart from higher oil prices, India is also facing fertiliser supply disruptions linked to the conflict, a challenge for key crops such as wheat at a time when farmers are preparing for a possible El Nino weather pattern that often brings drought conditions.“This will all drag on India’s growth outlook, yet the ability of the RBI to look through the energy price shock from the Strait of Hormuz will be increasingly difficult given the overlapping nature of these supply shocks,” Langham said.The changing outlook marks a reversal from the optimism seen at the end of last year when RBI Governor Sanjay Malhotra described the economy as being in a “rare Goldilocks” phase, characterised by easing inflation and resilient growth.The Iran war has since altered that picture.India’s oil and gas import bill jumped 53% in April from March, prompting expectations of a sharp rise in the balance of payments (BoP) deficit.According to HSBC, the RBI’s latest measures could help limit some of the damage. Before Friday’s announcements, the bank had expected India’s BoP deficit to widen to about $65 billion in 2026-27. It now estimates the measures could improve the balance by around $30 billion. India’s BoP deficit stood at $25.2 billion, or 0.6% of GDP, in 2025-26.The government has also moved to curb gold imports, urged citizens to limit foreign travel and encouraged greater use of public transport to reduce fuel demand.However, economists say the broader macroeconomic picture remains challenging.Benchmark global crude prices surged to nearly $120 per barrel after the conflict began on February 28. Although prices have since eased, they remain about 30% higher than pre-war levels, while natural gas prices have risen 75%.Reflecting those pressures, the RBI expects inflation to average 5.1% in FY27, up from 3.48% in April, while economic growth is projected to slow to 6.6% from 7.7% in the previous financial year.Interest-rate markets have also shifted. Although the RBI kept rates unchanged last week, swap markets are now pricing in at least 25 basis points of rate hikes over the next three months and more than 75 basis points over the next year.“India continues to face deeper structural challenges which has weighed on foreign direct investment, employment, manufacturing expansion, consumption, and nominal GDP growth,” said Sat Duhra, portfolio manager at Asia ex-Japan equity team at Janus Henderson Investors, news agency Reuters quoted.Duhra said the energy shock could hurt both growth and public finances.“Any move to rein in public-sector capex to stabilise conditions would risk further slowing growth,” he said. “This leaves policymakers in a difficult position.”India has so far delayed fully passing on higher import costs to consumers. Petrol and diesel prices have risen by less than 10% since the conflict began, compared with increases of 50% or more in some other oil-importing Asian countries.Although fuel prices are officially deregulated, the government retains significant influence as the majority shareholder in key state-run fuel retailers.The Centre has also said it will not compensate fuel retailers for losses, a strategy analysts say could ultimately affect government finances through lower dividend receipts.Pressure is also building on subsidies. A government official said fertiliser subsidy expenditure could rise by 20% in 2026-27.The government has additionally cut taxes on petrol and diesel, foregoing about Rs 140 billion in monthly revenue.While the Centre has budgeted for a fiscal deficit of 4.3% of GDP this year, a Reuters poll forecast the deficit could widen to 4.7%, with some economists projecting it could approach 5%.India-based rating agency Crisil expects further increases in retail fuel prices and warned of wider economic consequences.“The broader effect will reverberate across the economy through higher-transport costs, pushing up both food and core inflation,” it said in a report.
