West Asia conflict: 7 key risks for India economy in FY27

Why West Asia matters for India right now

The ongoing conflict in West Asia is being widely assessed as a potential macro shock for India, mainly because of the country’s dependence on imported oil and gas and its exposure on the balance of payments side. Multiple notes and commentaries linked to the latest developments point to a combination of higher energy prices, supply disruptions, costlier logistics, and risks to remittances as key transmission channels. The concern is not limited to inflation, but also extends to fiscal arithmetic and the current account.

India enters this phase with a tighter fiscal position than before the pandemic and with less room to absorb sustained price shocks without policy trade-offs. At the same time, the external account looks more stable than in earlier episodes of stress, but the cushion is not unlimited, especially if foreign investment flows remain weak and oil prices stay elevated.

Fiscal deficit: improved since Covid, but constraints remain

Before Covid, the Union government’s fiscal deficit stood at 4.6% of GDP in 2019-20. A year later, it surged to 9.2%. The deficit then declined to 6.7% in 2021-22 and settled at 4.4% in 2025-26, helped by a push to capital expenditure and improved tax collections.

The supplied material argues that, given the West Asia impact, fiscal strategy may need to be revised. A fiscal deficit target of 4.3% for the current year had been set as an operational benchmark linked to the prevailing debt level. The same material flags that both debt and deficit levels may need “appropriate adjustment” if the shock persists and the government opts for cushioning measures.

External balances: current account looks better than past peaks

India’s current account deficit (CAD) is described as comfortable at around 1% of GDP in the first three quarters of 2025-26, especially compared with CAD levels of over 4% in 2011-12 or 2012-13. But the external picture is complicated by net foreign investment flows turning negative, with net foreign direct investment flows also declining last year.

The Gulf region’s role in remittances is another focal point. One section of the material notes that the Gulf accounts for about 38% of India’s total foreign inflows that help fund the current account deficit. With prolonged uncertainty, remittance flows from Indians working in Gulf countries may be adversely affected, adding another source of pressure on external balances.

What the Chief Economic Advisor flagged

Chief Economic Advisor V Anantha Nageswaran warned of “considerable downside” risk to India’s projected 7%-7.4% growth for 2026-27 if the war persists. In the finance ministry’s monthly economic review for March, he identified four channels through which India could feel the impact:

• Supply disruptions to oil, gas and fertilisers, and to exports
• Higher import prices
• Elevated logistics costs
• A possible drop in remittances from Indians working in Gulf countries

These channels collectively point to a familiar but difficult policy problem: inflationary pressure and weaker growth arriving together, while fiscal space is constrained.

Oil price sensitivity: why a $10 move matters

The material includes a quantified rule-of-thumb on crude sensitivity: every $10 rise in crude prices translates into a loss of about 0.5% of GDP. It also states that, if the war persists and oil prices rise by $10 per barrel on average, India’s 2026 GDP growth could drop from a projected 7.5% to a range of 5.5%-6%, while inflation could rise to 5%-6%.

Another estimate in the provided text links a $10 per barrel increase in oil prices to inflation via pass-through. It says the same shock can push wholesale inflation up by 80-100 basis points and consumer inflation up by 40-60 basis points, depending on fuel price pass-through.

What EY, Crisil, SBI Research and Moody’s are projecting

Ernst & Young’s “Economy Watch” assessment says the conflict has disrupted global crude oil and energy markets by affecting supply, storage, transportation and prices. EY estimates that if the impact persists throughout FY27, India’s real GDP growth could erode by around 1 percentage point and CPI inflation could rise by about 1.5 percentage points, from baseline estimates of 7% growth and 4.0% inflation. A separate EY-linked table in the supplied material also projects the CAD widening to 1.7% of GDP in FY27 from 1.0%.

Crisil has termed the episode the “largest energy shock on record”, with risks extending beyond oil into gas supply, trade flows, logistics and remittances. Its note warns that a prolonged conflict could shave up to 30 basis points off India’s GDP growth in FY27 and put pressure on inflation, the current account and the rupee.

SBI Research, in contrast, puts FY27 growth between 6.8% and 7.1%, even as it notes challenges from an oil crisis and West Asia tensions. It also points to FY26 growth of 7.6% and pegs FY27 inflation at around 4.5%, with a fiscal deficit projected between 4.5% and 4.6%.

Moody’s Ratings has revised its FY27 GDP growth projection to 6%, down from 6.8%, citing disruption from the conflict on global trade and energy along with increased inflation and instability for import-dependent nations.

Energy prices and the inflation-risk backdrop

One data point highlighted in the supplied material is Brent crude moving above $14 per barrel in March 2026, nearly 50% higher since the start of the year and above pre-conflict levels below $10. Higher global commodity prices are also described as increasing pressure on government subsidies for fuel and fertilisers.

On the external side, one note says the CAD is likely to widen to 2% of GDP from 1.5% due to a higher import bill. Another section estimates that sustained high oil prices could lift India’s monthly import bill by about $1-8 billion.

Policy response so far: excise cut and fiscal trade-offs

The government has already reduced the special additional excise duty on petrol and diesel to provide relief to oil refining and marketing companies. The supplied material adds that, on an annualised basis, the Centre’s revenue loss could be around INR 130,000-170,000 crore, based on some estimates.

The same set of notes references an Economic Stabilization Fund of INR 100,000 crore, while cautioning that persistently high energy prices might require further fiscal support and complicate deficit targets. It also cites the IMF’s projection of India’s general government deficit at 7.2% of GDP for 2026, implying less room for a large stimulus compared with some Asian peers.

Key estimates at a glance

Why this episode tests India’s macro cushion

The combined message across the supplied material is that India faces a multi-channel shock: energy and fertiliser supply disruptions, price pressures, logistics costs, and possible remittance weakness. While the CAD is currently far below the >4% levels seen in 2011-12 and 2012-13, the risk profile changes if oil prices stay high and foreign investment flows remain negative.

For fiscal policy, the challenge is balancing support measures against a deficit path that had improved meaningfully after the pandemic. The already-announced excise-duty reduction shows how quickly revenue can be affected when the government tries to cushion energy-linked stress, especially if higher commodity prices translate into higher subsidy requirements.

Conclusion

The West Asia conflict is being assessed as a significant downside risk to India’s FY27 growth and inflation outlook, mainly through energy prices, supply disruptions, logistics costs and remittance exposure. With fiscal deficit targets and external balances both in focus, the next set of policy decisions is likely to hinge on how long the conflict persists and how oil prices and trade flows evolve.