India flags slower growth, wider deficit as Iran war raises the stakes for New Delhi

India has warned that its growth forecast of 7.0%–7.4% for the financial year ending March 2027 faces “considerable downside” risk due to rising energy costs and supply‑chain disruptions linked to the Iran war.

The conflict, which began on Feb. 28 following U.S. and Israeli strikes on Iran, has disrupted goods movement through the Strait of Hormuz — a critical waterway carrying 20% of global oil — driving up energy and freight costs and straining supply chains.

“The trade deficit will rise significantly” in the next financial year ending March 2027 and will lead to “widening [of] the current account deficit,” India’s Chief Economic Adviser V. Anantha Nageswaran wrote in ‌the ⁠report published Saturday.

“Keeping it manageable will require burden-sharing between the government, via fiscal absorption, and households and businesses,” he said. However, the pass-through of higher import prices to end-users “will also moderate demand growth,” said Nageswaran.

So far, the Indian government has shown little inclination to pass the rising energy costs to consumers. On Thursday, it cut central excise duties on petrol and diesel for domestic consumption by 10 rupees ($0.11) per liter each to prevent pump prices from rising as the Iran war disrupts global energy supplies.

The government also raised duties on exports of diesel and aviation turbine fuel, with Finance Minister Nirmala Sitharaman saying it was done to “ensure adequate availability of these products for domestic consumption.”

“This will provide protection to consumers from a rise in prices,” Sitharaman said in a post on X on Friday. This move will hurt India’s tax revenues, India’s Petroleum and Natural Gas Minister Hardeep Singh Puri said Friday.

A note from global brokerage Nomura on Saturday said that if crude oil prices “remain elevated,” pump prices will eventually be increased, but added that such a move is likely to happen “after the state elections, which are scheduled for April, with the final results on 4 May.”

India relies on supplies from the Strait of Hormuz for about 50% of its crude oil needs, according to Citi, and imports most of its liquefied petroleum gas, or LPG — the primary cooking fuel for both commercial establishments and households — through this route.

Alternative supplies of crude and liquified natural gas, or LNG, are available but come with delays and higher costs, the finance ministry’s monthly report said. It added that LPG is far harder to replace because nearly all of it comes from conflict‑hit regions and domestic refinery yields are very low.

“If demand moderates in response to higher prices, the central bank will be more inclined to treat the inflationary impact as a supply shock,” Nageswaran added. The RBI will announce its latest monetary policy decision on April 8.

India’s crude basket cost has risen from below $80 to about $140 and this will “definitely” have an impact on its current account deficit, Naveen Mathur, director of commodities and currencies at Indian brokerage Anand Rathi International Ventures, said on CNBC’s “Inside India” on Monday.

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

While official government data on the impact of disruptions from the Iran war in March is not yet available, high‑frequency private sector data is already showing signs of stress. India’s private‑sector activity in March slowed to its weakest level since October 2022 amid weaker domestic demand, according to the HSBC flash Purchasing Managers’ Index compiled by S&P Global.

Companies surveyed said the Middle East conflict, unstable market conditions, and inflationary pressures have “dampened growth,” while cost inflation is near a four‑year high, S&P Global reported.