India's growth stable, informal sector hit by US-Iran war: Survey
What's the story
A recent Reuters poll of economists has shown that while India's growth outlook remains stable, the ongoing US-Israeli war with Iran is severely impacting the country's informal economy. The survey was conducted between April 20 and April 27 among 54 economists. The findings highlight the challenges in assessing the impact on informal sectors due to a lack of real-time data on jobs, demand, and direct effects on micro and small businesses.
Economic strain
Shadow economy under pressure
The shadow economy, which has previously accounted for nearly half of official GDP readings, is now facing severe pressure. In Indian cities, where nearly 60% of GDP is generated, the shortage of liquefied petroleum gas (LPG) cylinders has forced many restaurants and hotels to shut down or reduce their operations. Some have even switched to alternative cooking fuels due to these disruptions.
Data gap
Economists call for more data inputs to assess impact
Despite the new GDP series' efforts to include more data inputs and provide a clearer picture of India's informal economy, economists believe there's still a long way to go. Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, told Reuters that "The informal segment is the worst hit and its ability to absorb shocks is very low. So we will see a ripple effect on jobs and demand—which is going to play out if this problem persists beyond the near term"
Financial impact
Long-term effects on finances and capital expenditure
In the long term, economists expect the West Asia conflict to affect people's finances despite government efforts to shield the economy from price pressures. This could lead to a diversion of spending away from capital expenditure, a key growth driver amid weak private investment. Aditya Vyas, Chief Economist at STCI Primary Dealer Ltd., warned that "if push comes to shove, there could be a situation where a material diversion of funds from capex to subsidies happens."
Economic projections
GDP growth and inflation expectations
The Reuters poll predicts India's GDP will grow by 6.7% in the current fiscal year, slightly down from the 7.0% projected for the year ending March 31, 2026. Growth is expected to rise to 6.8% in 2027-28. Inflation is expected to average at a rate of 4.5%, within RBI's target range but more than double last year's pace. Despite these challenges, economists expect RBI to keep rates on hold until end-2027.