How the Conflict Impacts India's Economy
A prolonged Middle East conflict could reduce India's GDP growth by about 1 percentage point and push inflation up by 1.5 percentage points from current forecasts. India is highly vulnerable due to its heavy reliance on imports, sourcing nearly 90% of its crude oil, as well as significant amounts of natural gas and fertilizers from abroad. These external shocks are likely to spread through various sectors due to strong links with oil and energy markets.
Sectors Facing Direct Impact
Industries that rely heavily on employment, such as textiles, paints, chemicals, fertilizers, cement, and tires, are directly affected by the conflict. A drop in jobs or income in these areas could further weaken demand, impacting both supply and demand. Even if fighting stops, rebuilding disrupted supply chains and logistics could take a significant amount of time.
Government Prepares a Buffer
To counter potential risks, the Indian government established a Rs 1-lakh crore Economic Stabilization Fund (ESF) for FY26 as a financial buffer. If the economic impact continues into FY27, the government may need to enact significant support measures. This could involve working with larger states and potentially increasing the fund's resources.