Middle East Conflict Could Impact Investment in India, Mitigating Benefits from EU and US Trade Agreements
The ongoing conflict in the Middle East poses significant risks to India’s economic growth, according to a recent report by Fitch Group’s BMI. While the firm maintains its GDP growth projection for FY2026/27 at 7%, it warns that rising geopolitical tensions could deter investment and diminish the benefits expected from trade agreements with the European Union and the United States. The situation is evolving, and BMI is closely monitoring its potential impact on India’s economy.
Geopolitical Tensions and Economic Impact
BMI’s report highlights that the conflict in the Middle East, particularly the military actions involving the US and Israel against Iran, could lead to increased uncertainty in the region. This uncertainty is expected to discourage foreign investment in India, which could counteract the positive effects anticipated from recent trade deals with the EU and the US. The firm noted that the situation is fluid, and they are actively assessing how these geopolitical developments might affect India’s growth trajectory.
The report specifically points to the potential closure of the Strait of Hormuz, a critical maritime passage for oil shipments. BMI estimates that such a closure could reduce India’s GDP by up to 0.5 percentage points due to rising energy costs. With India relying on imports for approximately 88% of its crude oil needs, any sustained increase in oil prices could significantly inflate the country’s import bill and exacerbate inflationary pressures.
Trade Agreements and Economic Prospects
Despite the geopolitical challenges, BMI acknowledges that recent trade agreements could bolster India’s economic outlook. In early February, India and the US reached a preliminary agreement to establish a new trade framework, which includes a reduction of tariffs to 18%. However, this framework must be formalized into a legal document before the first phase of the bilateral agreement can be implemented.
Additionally, the US Supreme Court’s ruling against the tariffs imposed by the previous administration may further influence trade dynamics. The court determined that former President Donald Trump exceeded his authority when he invoked the International Emergency Economic Powers Act to impose tariffs on several countries. Following this ruling, the US implemented a temporary 10% tariff on all nations, with plans to potentially increase it to 15%. These developments could create both opportunities and challenges for India’s trade relationships.
Future Outlook Amidst Uncertainty
BMI’s report emphasizes that while the policy environment in India appeared relatively stable at the beginning of 2026, the escalating tensions in the Middle East introduce new risks to the country’s growth outlook. The firm is closely monitoring these developments, as they could have far-reaching implications for India’s economy.
In addition to the trade agreements with the US, India and the EU have also made progress towards a free trade agreement, which is expected to be implemented within a year following legal ratification. This agreement could provide a significant boost to India’s trade prospects, but the overall economic landscape remains uncertain due to external geopolitical factors.
As the situation evolves, stakeholders in India will need to navigate these complexities to ensure sustained economic growth in the face of potential disruptions.
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