The Finance Ministry on Saturday said that the oil price shock poses an unexpected upside risk for inflation in the medium term amid the West Asia Conflict, and there will be a 'considerable downside' to the GDP growth projection.
In its latest monthly economic review, the finance ministry stated that the geopolitical developments have introduced a complex and multi-layered set of risks for India, given its position as a major energy importer with strong trade, investment, and remittance linkages with the West Asia region.
"While India's relatively robust macroeconomic fundamentals and sustained policy efforts provide resilience, the evolving situation warrants close monitoring and calibrated policy responses. The near-term outlook remains uncertain, with external shocks posing downside risks to growth through higher input costs and supply constraints, even as domestic demand may help cushion the impact."
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The report also stated that on the 27th February, they upgraded India's growth estimate (at constant prices) for FY27 to a range of 7.0 percent to 7.4 percent, adding, "Clearly, there is considerable downside to this number."
The Finance Ministry also said that the oil price shock poses an unexpected upside risk for inflation in the medium term and supply disruptions and higher input costs are being transmitted into domestic prices, particularly in fuel-intensive sectors.
"While supply disruptions have added to cost pressures, selective price corrections in perishables, amid export-related dislocations, point to localised demand-supply imbalances. A sustained elevation in oil and gas prices could lead to broader second-round effects through input cost pass-through across sectors."
Further stating that the government remains vigilant, with measures underway to ensure adequate domestic energy availability and mitigate potential inflationary pressures, the report noted that elevated global crude oil prices also pose risks to the merchandise trade balance.
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"While the outlook for remittances also remains sensitive as the Gulf Cooperation Council economies 36 accounted for about 38 percent of India's total remittances in FY24 and host nearly half of India's migrants worldwide."
The report noted that 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 data reflect that the recent shocks are being transmitted through higher input costs, supply constraints, and pressures across sectors, with early indications of some moderation in economic activity. While domestic demand conditions have remained relatively stable so far, risks to growth are increasingly evident, particularly for sectors dependent on imported inputs."
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