A test of India’s macroeconomic resilience

This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.

The Middle East war underscores the need for structural energy de-risking. India must raise strategic petroleum reserves alongside diversifying its energy sources and accelerating the adoption of electric vehicles. The country ranks second globally in fertilizer production, but demand growth is outpacing supply, which relies heavily on imported raw materials. Global supply disruptions make domestic fertilizer security essential for food security.

India’s annual GDP growth of 7.3% between fiscal years 2023 and 2026 (April 1 to March 31) was shaped by strong domestic demand and supportive policies. In fiscal year 2026, growth of 7.6% and inflation of 2.0% were more favorable than anticipated.

High tariffs imposed by the US had a lower-than-expected impact on exports due to front-loading, diversification, robust services and exemptions for fast-growing sectors such as electronics.

Rate cuts by the Monetary Policy Committee of the Reserve Bank of India (RBI) and fiscal stimulus in the form of goods and services tax rate rationalization, income tax relief and direct benefit transfers created an upside to growth.

The low current account deficit (CAD), healthy foreign exchange reserves, strong corporate and bank balance sheets, and fiscal prudence bolstered India’s resilience, with capital outflows and a depreciating rupee the main challenges in an otherwise dynamic macroeconomic story.

The Middle East war has been the biggest test of India’s resilience in recent years. It triggered the largest energy shock on record, and its consequences extend to freight and insurance costs, supply chains, and fertilizers, which have a multidimensional impact on the economy. Its ultimate impact will depend on the scale, intensity and duration of the conflict.

The Middle East war has led to energy price spikes and supply constraints, which are feeding into broader economic stress.

Higher crude oil prices and tighter gas supplies will weigh on growth, especially in manufacturing, construction and services such as travel, transport and restaurants. Some manufacturers are shifting to alternative fuels, but cost pressures persist.

India’s exposure to the Middle East amplifies these risks. The region accounts for 45%-50% of India’s oil imports and is a key source of gas, fertilizer and industrial inputs. It also accounts for 22% of India’s goods imports and 13% of exports. Exposure in sectors such as basmati rice, meat, ceramics, petroleum products, and gems and jewelry is even higher. The Gulf Cooperation Council countries contribute 38% of India’s remittance inflows, supporting millions of households. The Middle East’s share in India’s foreign direct investment has risen rapidly in recent years.

The growth outlook for fiscal year 2027 now stands at 6.6%. This is below our earlier forecast of 7.1% and 7.6% in fiscal year 2026, driven by the continuation of the Middle East war as well as the destruction of energy infrastructure and consequent gas supply shortages slowing industrial production. Brent crude oil is forecast to average $96/barrel this fiscal year and about $90/barrel in fiscal year 2027.

Healthy private consumption and steady investment should support growth. Exports should be aided by lower US tariffs, but disruptions in exports to the Middle East, rising shipping costs and constraints, and weakening global demand will keep export growth tepid.

Since the onset of the Middle East war, the RBI has mitigated stress in financial and currency markets through open-market operations and foreign exchange regulations. Simultaneously, the government has introduced measures to cushion the economy from rising import costs and supply disruptions, prioritizing consumers while extending sector-specific support.

Energy availability measures include directing refiners to boost LPG output by diverting feedstock and prioritizing natural gas allocation. Domestic piped natural gas, compressed natural gas for transportation and LPG have received full-supply priority, followed by fertilizers, industry and city gas networks with prespecified allocations.

Additional steps include raising export duties on diesel and aviation turbine fuel, cutting excise duties on petrol and diesel, increasing commercial LPG allocation, extending export credit timelines, and granting temporary customs duty exemptions on key petrochemical products. A prolonged conflict could strain public finances due to higher subsidies and limit monetary policy space as inflation risks rise.

• Energy security: The Middle East war underscores the need for structural energy de-risking amid geopolitical uncertainty. India must raise strategic petroleum reserves to meet future exigencies. Renewable energy investments in wind and solar should continue alongside faster adoption of nuclear technology, targeting 20 gigawatts of capacity by 2030. Electric vehicle adoption requires acceleration supported by investments in critical renewable energy storage infrastructure.
• Food security: Domestic fertilizer security is essential for food security, given global supply disruptions resulting from conflicts and export restrictions. India ranks second globally in fertilizer production, but demand growth is outpacing supply. Achieving fertilizer security is vital for India’s large population, free food programs and agricultural income stability.
• Economic reforms: Sustained deregulatory measures and structural reforms are essential for facilitating business and strengthening India’s position as a competitive investment destination. The recently concluded foreign trade agreements with the EU and the UK offer a strategic opportunity to expand export markets. To leverage them, India must strengthen manufacturing competitiveness through targeted improvements in productivity, supply chain efficiency, and research and development.