India may lose 1% GDP growth if US-Iran war continues
What's the story
The ongoing conflict between US and Iran in West Asia could have a major impact on India's economic growth, according to a recent report by EY. The study predicts that if the conflict continues into the next fiscal year, India's real GDP growth could take a hit of around 1%. Retail inflation could also rise by some 1.5% from baseline estimates. This is primarily due to disruptions in global crude oil and energy markets affecting supply, storage, transportation and prices.
Sectoral impact
Aggregate demand may be dampened
The EY report also highlights that several sectors, especially those related to employment such as textiles, paints, chemicals, fertilizers, cement and tires could be directly affected by the ongoing conflict. A decrease in employment or income in these sectors could further dampen aggregate demand. This means both supply and demand conditions could be negatively impacted by global oil market disturbances.
Vulnerability
India relies heavily on crude oil imports
India's economy is highly dependent on crude oil imports, with nearly 90% of its requirements being met through imports. The country also relies heavily on natural gas and fertilizers from other countries. This makes India particularly vulnerable to external shocks like the ongoing conflict in the Middle East. The adverse effects are likely to affect multiple sectors due to strong forward and backward linkages with crude oil and energy.
Policy measures
Government may need to implement strong countercyclical policy
In light of these potential challenges, the Government of India may have to implement a strong countercyclical policy. It could also be wise for the government to involve larger and more industrialized states in this effort. The report suggests additional provisions could be made to increase the Economic Stabilization Fund (ESF) set up by the government in FY26 as a financial buffer against global headwinds.
Remittance concerns
Remittance inflows could decline
A separate report by SBI Funds Management also highlights the potential impact of the Middle East conflict on India's economy. It warns that remittance inflows could decline as a major chunk of money sent back to India comes from the Gulf region. The report emphasizes that about 38% of total inward remittances come from this region, with half coming from UAE alone.
Economic pressure
Current account balance under threat
The SBI report also warns that high crude oil prices could worsen India's current account balance and put pressure on the broader economy. It estimates that every $10 per barrel rise in crude price widens the annual Current Account Deficit (CAD) by $15 billion. If oil prices stay around $100 per barrel for a long time, the CAD could widen significantly by up to $70 billion, according to the report.