Geopolitical tensions in West Asia could put a strain on India's economic growth as higher crude prices, supply disruptions and trade constrictions may pose a risk to the country's external balances, inflation and its GDP growth, according to Crisil report.
Key Highlights
- Crisil warns prolonged West Asia tensions could drag India’s GDP growth down to 6.5%.
- Rising crude prices and trade disruptions may increase inflation and widen India’s deficit.
In its latest report titled “Economic Impact of West Asia Shock”, Crisil warns that the conflict is now fast emerging as one of the largest on record in terms of the impact on energy supplies, the supply of liquefied natural gas (LNG), shipping routes and trade corridors. The partial closure of the Strait of Hormuz—which supplies almost 20 percent of the world's oil-is already having an impact on energy markets and rising import costs for key oil-consuming countries including India, the agency said.
The report pointed out the closure of oil production sites in certain areas of West Asia and casualties to the world's biggest LNG plant in Qatar have aggravated the supply worries, which have spread to the commodity and freight markets worldwide.
India's GDP growth may slow down to 6.8% in FY27 under its alternate scenario as against the base case estimate of 7.1%, Crisil estimates, alluding to the high energy prices, subdued exports and disrupted supply chains.
If the situation of the conflict gets worse and more persistent, the GDP growth will be reduced to 6.5% and the average price of Brent crude oil will be almost $100 per barrel in the fiscal year.
The agency also cautioned for the possibility of a rapid acceleration of inflationary pressures. Consumer price inflation is expected to increase to 4.7% under the alternate scenario, and could surge to 5.4% if disruptions persist for more than two months.
Increased fuel costs, logistics costs and transport costs will likely impact input costs in various sectors, increasing the likelihood of widespread price pressure for consumers.
India’s Trade Deficit and Energy Security Face Rising Risks
Crisil projects India’s current account deficit could widen to 2 percent of GDP, compared with the base-case estimate of 1.5 percent, due to a larger oil and gas import bill, weaker exports, and softer remittance inflows.
India remains heavily dependent on West Asia, which accounts for:
- 40-50% of India’s crude oil imports
- 38% of remittance inflows
- Nearly 8%t of foreign direct investment inflows
The report noted that 46% of India’s crude imports transit through the Strait of Hormuz, making the country particularly vulnerable to prolonged disruption.
Liquefied petroleum gas (LPG) imports are even more exposed, with 85-95% routed through the strategic shipping passage. International LNG prices have already surged 69% month-on-month, while Brent crude has risen 45%, sharply increasing import costs.
Also Read: Trade Deficit Widens to $28.38 Billion in April Amid West Asia Crisis
Key Sectors Could Face Severe Cost Pressure
Crisil identified fertilisers, petrochemicals, manufacturing, transportation, and food processing as the sectors most vulnerable to sustained energy price shocks. The fertiliser sector faces acute risks, as West Asia supplies over 40% of India’s fertiliser imports and nearly 65% of urea shipments.
There could also be losses in exports due to the disruption of trade channels. West Asia supplies 13% of the merchandise exports to India, which also includes substantial volumes of Basmati rice, petroleum products, ceramics, and gems and jewellery.
The Crisil report also pointed to the fact that more than 9.3 million Indians are employed in the countries of the Gulf Cooperation Council, contributing about 38% of India's remittance receipts, and that any slowdown in the economies of the GCC countries is likely to add to worries about remittance stability.
Government Measures and Long-Term Strategy
To mitigate the shock, measures have been taken by the government and the Reserve Bank of India, such as reduction in excise duties, increase in LPG allocation, providing export credit support, customs duty waiver on critical petrochemical products, and relaxation in foreign exchange derivative regulations.
The crisis has further underscored the importance of diversifying energy sources, increasing strategic petroleum stocks, promoting investments in renewable power and boosting local production of fertilizers in India.
India's economy has so far withstood global disruptions even as it faced them repeatedly in the last few years and the economy continued to rely on strong domestic demand, structural reforms and infrastructure spending for long-term growth prospects.
