India reconsiders fiscal and industrial policy options while navigating global risks

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.

In response to severe economic shocks from the ongoing Middle East war, India is pivoting its risk management approach from providing immediate buffers to building long-term strategic resilience. To navigate this global volatility, the country is actively recalibrating its fiscal policies, easing foreign investment rules to boost domestic self-sufficiency, and diversifying its energy and labor partnerships.

The sustained nature of the Middle East war is changing Indian risk management from providing immediate buffers to reorienting medium- to long-term strategies. Even before the conflict, the Economic Survey 2026 highlighted risks of a “disorderly multipolar breakdown,” rupee depreciation and foreign portfolio outflows. These risks are now likely to be exacerbated.

The HSBC India Purchasing Managers’ Index (PMI) data for March 2026 shows a slowdown in private sector activity. The HSBC India Composite PMI dropped to 57.0 in March from 58.9 in February, its weakest score since November 2022. While export strength and hiring provided buffers, growth in new orders was its slowest in over two years, marked by volatile markets and inflation. Cost pressures intensified across the manufacturing and service sectors. The PMI data signals ongoing expansion, but with uncertainty baked in.

Since the conflict began, the Indian government has rationalized cooking gas allocation, resumed Russian crude purchases, and announced additional fuel and fertilizer subsidies and large excise duty cuts on petrol and diesel. It has also unveiled an economic stabilization fund designed to serve as a fiscal and financial buffer against future external shocks.

Geopolitical developments are likely to compel a rethink of India’s trade and industrial policy. The country will be keen to prioritize strategic self-sufficiency — a policy already underscored as the global trade environment began to shift in 2025 — to diversify risk across suppliers and enable deeper manufacturing ecosystems at home.

The Indian government announced a consequential shift in its regulatory position on March 11, when it eased foreign direct investment (FDI) rules introduced on security grounds in 2020 for investors from India’s neighboring countries. FDI below 10% beneficial ownership will now bypass mandatory government approval in nonsensitive sectors, while strategic investment in sectors such as renewables will face a fast-tracked, 60-day clearance process.

This shift highlights India’s policy for supplier management. China remains a critical supplier of intermediate components in solar photovoltaic and semiconductor supply chains, and India’s pragmatic bet is to balance dependency with controlled engagement by reducing the risk of ad hoc supply disruptions and supporting domestic development. The government is also likely to scale back domestic content obligations in renewables and offer targeted tax incentives to attract investors from mainland China, Japan and Taiwan.

A similar approach is likely in the defense sector and could include expanded FDI ceilings for trusted partners and strong technology-transfer clauses. The more traditional import-substitution logic is giving way to coproduction and innovation-driven collaboration, intended to bolster India’s national security objectives and economic options.

The Gulf Cooperation Council (GCC) is fundamental to Indian interests. It is an energy source and was home to almost half of India’s 18.5 million overseas workers in 2024. While the Indian government remains committed to the region, it is also likely to pursue diversification.

Gas-sourcing talks with Australia, the US, Mozambique and Nigeria are likely to be accelerated, and Indian public sector firms should pursue equity stakes in upstream projects once the conflict ends and commodity prices subside. For fertilizers, contracts with Indonesia, Russia, Belarus and Morocco will likely be fast-tracked as the sowing season approaches in June; the Indian media reports that some deals have already been announced. The Indian objective will straddle multidimensionality and overexposure risks.

The diversification imperative will also be applied to overseas employment and sustaining Indian avenues for remittance. India is likely to speed up efforts to complete trade agreement negotiations with countries within the Association of Southeast Asian Nations, with Latin American countries and with non-EU countries in Europe. In these free trade agreement (FTA) negotiations, India is likely to emphasize trade in services, with specific references to allow for professional and vocation-specific visas. These have been highlighted in FTAs signed with the UK and with New Zealand.

While the share of Indian workers outside the GCC has steadily risen — especially in IT services in the US and the UK — diversification of employment opportunities will be a priority, given that inward remittances accounted for 3.4% of India’s GDP in fiscal year 2024–25. This is likely to be affected by the ongoing war.

The Middle East war has sharpened focus on resilience within global cloud and data center architecture, but its implications for investment geography require a more careful interpretation. Hyperscalers such as Microsoft, Amazon Web Services and Google operate through leased data center capacity, particularly in international and emerging markets, alongside owned infrastructure. As part of long-standing disaster-recovery and business-continuity protocols, these companies hedge operational risk by distributing workloads across multiple facilities, both within the country and across international geographies. This redundancy-driven operating model predates the current Middle East war.

Cloud providers have recently activated these preexisting contingency plans. In some cases, workloads — primarily noncritical enterprise and banking, financial services and insurance applications — were temporarily routed to alternate regions, including Mumbai. This reflects the execution and validation of existing disaster-recovery frameworks, rather than a strategic relocation of primary data center infrastructure.

While the diversion to India is temporary, it does draw attention to the country’s role in a wider disaster-recovery strategy, which the Indian government is likely to underscore as part of its strategic diversification narrative.

Data center growth across the GCC should remain structurally strong. But AI-specific facilities, which are now larger in scale than traditional local data centers, are emerging as a major growth driver. India is being increasingly positioned as a complementary resilience and overflow geography within global cloud architectures. This is becoming more visible at the margin, particularly for disaster recovery, AI experimentation and selective cross-border backup workloads. Industry feedback indicates that Indian data center developers are responding to this incremental demand by expediting project timelines, advancing fit-outs, power arrangements and commissioning schedules to capture any near-term leasing interest.