On February 27, chief economic adviser V Anantha Nageswaran had reason to feel confident about India’s economic growth. Speaking at the launch of the new national accounts (GDP) series with 2022–23 as the base year, he lifted India’s FY27 growth forecast to a range of 7 to 7.4 per cent — nudging it up 20 basis points from the 6.8–7.2 per cent projected in January’s Economic Survey.

The economy, he declared, was more likely to achieve a number closer to 7.4 per cent. India, it seemed, was entering FY27 in a Goldilocks moment: strong growth, cooling inflation and a manageable external account.

That moment did not last long. The very next day, Israel and the US launched a full-blown war on Iran, killing the Supreme Leader Ali Khamenei. Within weeks, the West Asia war and closure of the Strait of Hormuz sent the mandarins of India’s finance ministry back to the drawing board.

In the monthly economic review for March, Nageswaran acknowledged that there was now “considerable downside” to the earlier projection.

Expenditure secretary V Vualnam, speaking at a growth conference at Ashoka University in May, put it more starkly: the Goldilocks situation has changed, and fiscal stress was very much a reality. The arithmetic of the Union Budget, presented earlier, was suddenly in question.

The unravelling has been swift. Brent crude surged to over $126 per barrel by April 30, and the rupee touched a record low of 95.35 against the dollar on the same day — twin blows that struck at the heart of India’s import-heavy, oil-dependent economy.

Natural gas markets are flashing similar stress signals. The Japan-Korea Marker (JKM), a key Asian benchmark, briefly crossed $20 per mmbtu in March — almost double the levels seen just weeks earlier — tightening input costs for multiple sectors.

Fuel price

At the retail level, oil marketing companies have already raised prices of non-subsidised domestic LPG and commercial cylinders in response to higher global rates and supply constraints. Petrol and diesel prices, however, have remained unchanged so far, with the government cushioning the impact through excise duty adjustments — effectively absorbing a significant portion of the price shock.

Fertiliser imports

The pressure extends beyond fuel. India’s dependence on fertiliser imports adds another layer of vulnerability. Even domestically produced urea is exposed to global volatility, as manufacturers rely on imported liquefied natural gas as feedstock, pushing up production costs.

A host of downgrades followed. Goldman Sachs became the first major agency to cut India’s FY27 growth forecast, slashing it to 6.5 per cent from 7 per cent. Moody’s made a sharper cut, slashing its estimate to 6 per cent from 6.8 per cent. EY India has painted an even starker scenario. Its Economy Watch report warned that India’s real GDP growth for FY27 could erode by around 1 percentage point from baseline estimates if the West Asia conflict persists through the full fiscal year.

The risks now confronting India are wide, deep and interlocking. An oil price shock is the most immediate — every 10 per cent increase in crude oil prices is estimated to raise inflation by up to 50 basis points.

Inflation check

Headline CPI inflation could inch up towards 5 per cent in FY27 (RBI projection: 4.6 per cent) driven by higher fuel prices, costlier airfares, supply chain disruptions and food inflation risks linked to weak rainfall after the India Meteorological Department’s first long-range forecast projected a sub-normal monsoon for 2026.

The rupee’s slide and clocking of new record lows could widen the current account deficit — now projected at 2.5 per cent of GDP in FY27 — while foreign portfolio outflows remain elevated. Bond yields are under pressure, the fiscal deficit arithmetic is fraying at the edges, and for India’s IT sector, the compounding disruption of AI adoption is casting a shadow over a pillar of the economy’s export earnings.

US tariff uncertainty adds yet another layer of risk for exporters who were hoping that trade agreements were within reach.

India’s economic resilience is real — but so are the challenges. The Telegraph spoke to economists, industrialists and market analysts who list the major headwinds the economy could be facing in FY27.

Consumption constraints

The broader economic consequences of the war in West Asia are now coming into sharper focus.

Koushik Chatterjee, executive director and chief financial of Tata Steel, India’s leading steelmaker, said “India is at a pinch point, hit with four simultaneous shocks on oil and energy, currency, supply chain adversity and fertiliser.”

Upasana Chachra, chief India economist at Morgan Stanley, concurred. “Persistently elevated global commodity prices have ramifications across all economic agents,” she said.

According to her, the impact on households is more likely to be second-round rather than immediate.

“Higher inflation will erode purchasing power and weigh on private consumption across both rural and urban areas,” said Chachra.

Urban demand, she noted, could weaken in discretionary segments amid softer real incomes and uneven job creation. Rural demand, meanwhile, faces a dual squeeze—from rising farm input costs, such as fuel and fertilisers, and from elevated food prices that crowd out non-essential spending.

With state elections over and buzz of an imminent hike of retail price of petrol and diesel growing louder as public sector oil companies report daily under recoveries of ₹1,000 crore, Indian households may have to brace for turbulent times ahead, with a direct hit on consumption, especially discretionary.

Margin squeeze

Corporate India is bracing for a margin squeeze as well. Energy-intensive sectors such as cement, metals, chemicals, logistics and consumer goods are particularly exposed to rising input costs.

“With limited pricing power, cost-push inflation is likely to compress margins and weigh on earnings. This, in turn, could dampen business confidence and delay a full recovery in the private capex cycle,” Chachra added.

The fiscal burden, too, is set to rise. “The government is likely to absorb the first-round impact to shield households and corporates. However, higher subsidy outgo — especially on fertilisers and fuel —along with potential revenue shortfalls could increase the risk of fiscal slippage, underscoring the need for expenditure prioritisation,” she said.

Markets are already factoring in the next leg of adjustment. “Attention is now turning to the likelihood of an increase in domestic retail fuel prices, as Brent crude remains above $100 per barrel. Fertiliser subsidies are also likely to overshoot FY27 budget estimates,” said Radhika Rao, executive director and senior economist at DBS Bank.

From a strategic standpoint, the risks extend beyond near-term price pressures. “India has made steady progress over the past decade in strengthening energy security, including initiatives such as Urjaa Bharat. However, dependence on the Gulf for oil, LPG, LNG and fertilisers remains very high,” Tata Steel’s Chatterjee observed.

“A prolonged disruption at the Hormuz chokepoint would have cascading effects on the economy, which will take a long time to re-anchor back. It is critical to accelerate the development of alternative supply routes, similar to China’s push via the Polar Silk Route in the Arctic,” he added.

While the initial expectation of a short-lived conflict has faded, the impact so far has been contained. “The concern remains of a long-drawn West Asian conflict on the Indian economy, especially on the household (LPG) and agriculture (fertiliser),” Chatterjee said.

To be continued