Economists Warn Supply Issues and Rising Oil Prices Could Impact Growth and Drive Inflation

The ongoing conflict in West Asia, coupled with disruptions in supply chains and rising oil prices, is projected to impact India’s economic growth significantly in the upcoming financial year of 2026-27. Economists estimate that the country’s GDP growth could be reduced by 15 to 40 basis points, while inflation may also see an uptick if the geopolitical tensions continue. With oil prices potentially remaining high, the economic landscape appears increasingly uncertain.

Potential Impact on GDP Growth

Economists are closely monitoring the situation as the conflict in West Asia unfolds. Rajani Sinha, chief economist at CARE Ratings, indicated that if oil prices stay elevated between $100 and $120 per barrel throughout the year, India’s GDP growth could be trimmed by as much as 40 basis points, bringing it down to approximately 6.8%. This scenario is contingent on the continuation of the conflict, which could further exacerbate economic challenges. Sinha emphasized that the impact on retail inflation will largely depend on whether the increased fuel costs are passed on to consumers. The government is expected to make efforts to stabilize prices, but oil companies may also absorb some of the costs. Current estimates suggest inflation could rise above 5% in FY27, up from an earlier projection of 4.3%.

Inflationary Pressures and Consumer Prices

IDFC Bank’s chief economist, Gaura Sengupta, noted that market prices for essential commodities like petrol and diesel are likely to remain stable in the short term. However, she warned that even a modest 10% increase in consumer prices for these fuels could reduce overall growth estimates by 15 basis points and push inflation up by 30 basis points. Additionally, rising gold prices are anticipated to contribute to core inflation. The economic forecasts are further complicated by the volatility of oil prices, which could lead to increased input costs across various sectors.

Revised Economic Forecasts

Following recent GDP estimates, chief economic adviser V Anantha Nageswaran raised the growth forecast for FY27 to a range of 7% to 7.4%. The Economic Survey presented in Parliament earlier this year projected headline inflation at 3.9% for the first quarter and 4% for the second quarter of FY27. However, Bank of Baroda’s chief economist, Madan Sabnavis, predicts a rise in inflation by 40 to 50 basis points due to supply chain disruptions and high fuel costs. He cautioned that prolonged volatility in oil prices could push inflation up to 4.5%, limiting the Reserve Bank of India’s ability to implement further rate cuts.

Future Economic Outlook

Sakshi Gupta, principal economist at HDFC Bank, expressed concern that a 10% increase in average crude prices next year could result in retail inflation being 20 to 30 basis points higher, while GDP growth might be 20 to 25 basis points lower than the projected 7.2%. Aditi Nayar, chief economist at ICRA, highlighted that the overall economic impact hinges on the duration and extent of the conflict, as well as its implications for domestic investment, inflation, and external trade. As the situation develops, economists will continue to assess its potential effects on India’s economy.

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