India warns of slowing growth and widening deficit as New Delhi’s crisis heightens over Iran war

India has warned that its growth forecast of 7.0% to 7.4% for the fiscal year ending March 2027 faces “significant downside risks” due to rising energy costs and supply chain disruptions related to the Iran war.

The conflict, which began on February 28 after US and Israeli attacks on Iran, has disrupted the movement of goods through the Strait of Hormuz, a vital waterway that carries 20% of the world’s oil, raising energy and cargo costs and straining supply chains.

India’s Chief Economic Adviser V. Ananta Nageswaran said in a report released on Saturday that the next financial year ending in March 2027 will see a “significant increase in trade deficit” leading to “widening of current account deficit”.

“To keep it manageable, the burden needs to be shared between governments, households and businesses through fiscal absorption,” he said. But “demand growth will also slow down” as higher import prices are passed on to end users, Nageswaran said.

So far, the Indian government has shown little intention of passing on rising energy costs to consumers. On Thursday, central excise duties on gasoline and diesel for domestic consumption were cut by 10 rupees ($0.11) per liter each to prevent pump prices from rising due to disruptions to global energy supplies caused by the Iran war.

The government also increased customs duty on exports of diesel and aviation turbine fuel, which Finance Minister Nirmala Sitharaman said was “to ensure adequate availability of these products for domestic consumption”.

“This will protect consumers from price increases,” Sitharaman said in a post on X on Friday. India’s Petroleum and Natural Gas Minister Hardeep Singh Puri said on Friday that the measure would hit India’s tax revenue.

Memo from a global securities company Nomura The prime minister said on Saturday that pump prices would eventually rise if oil prices “remain high,” but added that such a move was likely “after the state elections scheduled for April, with final results to be decided on May 4.”

India has announced that it relies on supplies from the Strait of Hormuz for about 50% of its crude oil needs. cityand imports most of its liquefied petroleum gas (LPG), the primary cooking fuel for both commercial and domestic use, through this route.

Alternative supplies of crude oil and liquefied natural gas (LNG) are possible but come with delays and higher costs, the Ministry of Finance’s monthly report said. He added that replacing LPG is much more difficult as almost all of it is produced in conflict areas and domestic refinery yields are very low.

“If demand slows in response to rising prices, central banks will be more likely to treat the impact of inflation as a supply shock,” Nageswaran added. RBI is expected to announce its latest monetary policy decision on April 8th.

India’s crude oil basket cost has risen from below $80 to around $140, which will “definitely” impact the current account deficit, Naveen Mathur, director of commodities and currencies at Indian brokerage firm Anand Rati International Ventures, told CNBC’s “Inside India” on Monday.

He added that the government’s warning that the Middle East crisis would impact growth is “detrimental to India’s growth story”, which is already facing an exodus of foreign investors.

Official government data on the impact of the disruption from the Iran war in March is not yet available, but high-frequency private sector data is already showing signs of stress. Private sector activity in India slowed to its lowest level since October 2022 in March due to weak domestic demand, according to the HSBC Purchasing Managers’ Index compiled by S&P Global.

Companies surveyed said Middle East conflict, volatile market conditions and inflationary pressures are “slowing growth,” while cost inflation is nearing a four-year high, S&P Global said.