A prolonged conflict in West Asia could shave off up to 1 percentage point from India’s growth and push up inflation sharply, underscoring the economy’s vulnerability to energy shocks, according to a report by Ernst & Young.
The latest Economy Watch report by EY estimates that if the geopolitical tensions persist through FY27, India’s real GDP growth could fall by around 1 percentage point from its baseline projection of about 7 percent. At the same time, retail inflation, measured by CPI, could rise by nearly 1.5 percentage points from the baseline estimate of 4 percent.
This dual impact reflects the cascading effect of rising energy prices on both demand and supply conditions in the economy.
The report flags that sectors with high employment intensity—such as textiles, paints, chemicals, fertilisers, cement and tyres—are likely to face direct pressure. Any hit to jobs or incomes in these industries could weaken consumption demand, amplifying the slowdown.
India’s heavy dependence on energy imports makes it particularly exposed. The country imports nearly 90 percent of its crude oil needs and relies significantly on imported natural gas and fertilisers. As a result, disruptions in global energy markets tend to transmit quickly across sectors through strong forward and backward linkages.
According to EY, the ongoing conflict has already disrupted global crude oil markets by affecting supply chains, storage, transportation and pricing. Even if tensions ease soon, these disruptions may take time to normalise, keeping volatility elevated.
Crude prices have surged nearly 50 percent since the US and Israel launched strikes against Iran on February 28, triggering retaliatory actions and heightening uncertainty in global energy markets.
EY suggests that the Government of India may have to adopt a strong counter-cyclical policy response to cushion the impact. This could include greater coordination with large industrialised states and additional allocations to stabilisation mechanisms.
The Centre has already created a ₹1 lakh-crore Economic Stabilisation Fund (ESF) in FY26 as a buffer against global shocks. The report recommends enhancing this fund if risks intensify.
In its earlier February outlook, EY had projected India’s GDP growth at 6.8–7.2 percent for FY27. Meanwhile, the Organisation for Economic Co-operation and Development has taken a more cautious view, estimating growth could moderate to 6.1 percent next fiscal from 7.6 percent in the current year.
The evolving geopolitical situation, particularly in energy markets, is now emerging as a key variable that could shape India’s macroeconomic trajectory in the coming year.
