India’s financial year 2026-27 growth outlook is facing an unusual convergence of risks, including geopolitical disruptions to energy supplies, emerging food stress, and the prospect of a weak monsoon under a developing El Niño pattern. The West Asia crisis has already tightened LPG availability and now, a fresh risk is appearing on the horizon.
While projecting 6.8 to 7.1 per cent growth in FY27, the State Bank of India (SBI), in a report, warned that a combination of drought conditions and a strong El Niño could shave around 20 basis points off gross domestic product (GDP) growth in FY27 under the median scenario. El Niño alone, however, may have a negligible direct impact on growth.
The SBI report said climate events are often assessed in isolation, but the real economic stress emerges when El Niño coincides with drought conditions. Its quantile regression analysis showed that El Niño alone has a statistically insignificant impact on growth. When combined with drought, however, the median GDP loss is estimated at around 20 bps, rising to nearly 65 bps in an extreme scenario.
On overall growth, the report said India’s growth resilience stands out at a time when much of the global economy faces slowing momentum due to rising commodity prices and supply chain disruptions triggered by conflicts in West Asia. “India continues to demonstrate resilience with GDP likely to grow in the range of around 6.8 per cent-7.1 per cent, despite global uncertainties and regional conflicts,” the report said.
Growing Economic Concerns
What makes these developments significant is their timing. The Indian economy is entering FY27 after a year of strong growth, but with limited policy room to absorb fresh shocks. Any pressure on food prices, energy costs or rural incomes at this stage could complicate inflation management, restrict monetary flexibility and weigh on consumption at a time when domestic demand is expected to anchor growth.
This risk is particularly relevant in 2026 as the India Meteorological Department’s first monsoon forecast pegs rainfall at 92 per cent of the long-period average, the lowest forecast since 2002. At the same time, the US National Oceanic and Atmospheric Administration has raised the probability of an El Niño forming this year to 61 per cent, with a one-in-four chance that it could be strong.
Historical research cited in the report indicates that the relationship between El Niño and Indian droughts has strengthened over time. Since 1980, all six droughts in India have occurred in El Niño years. More recent research shows that the timing of El Niño onset matters: a summer El Niño (June to September) leads to a sharper rainfall deviation across the country compared with a spring onset. This raises concerns for the upcoming monsoon season.
However, the central government has said that it is well-prepared to manage any potential disruption from an emerging El Niño during the upcoming kharif sowing season, with Agriculture Minister Shivraj Singh Chouhan asserting that the overall impact on farm output is expected to remain moderate.
Chouhan said there was “no need for farmers to worry,” highlighting that coordinated planning and timely interventions would help cushion any adverse effects. The review assessed key parameters, including rainfall projections, reservoir levels, crop conditions, seed availability, and state-level preparedness, alongside contingency measures.
Officials added that certain crops, such as paddy, have shown greater resilience, while region-specific strategies are being developed for other crops. States have been directed to activate district-level contingency plans and ensure an adequate supply of seeds, fertilisers, and other inputs.
Apart from these climatic conditions, India has slipped to sixth place in the IMF’s 2025 global GDP rankings, despite strong nominal growth in rupee terms. While the economy grew to an estimated USD 3.92 trillion from USD 3.5 trillion a year earlier, the weakening rupee and revisions under the new GDP series moderated the pace of increase in dollar terms, allowing the United Kingdom and Japan to move ahead in the rankings.
Amid global economic uncertainty, the IMF projects India to remain the world’s sixth-largest economy in 2026 before climbing back up the rankings. It forecasts India’s GDP to reach USD 4.58 trillion in 2027, overtaking the United Kingdom, and to rise further to USD 5.06 trillion in 2028, surpassing Japan.
Moody’s Ratings has warned that prolonged instability in major oil-producing regions could heighten credit stress for energy-importing economies such as India, while CareEdge Ratings estimates that elevated crude prices could add a fiscal burden of about 0.5 per cent of GDP in FY27.
Morgan Stanley has cut its FY27 growth forecast by 30 basis points to 6.2 per cent, citing a supply-side shock from higher commodity prices, particularly crude oil. Reserve Bank of India Governor Sanjay Malhotra said the economy remains resilient but is entering a more uncertain phase as geopolitical tensions, energy shocks and global financial tightening weigh on the outlook.
Weak Monsoon And Rural Incomes
The macroeconomic transmission channel runs primarily through agriculture and food inflation. Data compiled by SBI Research showed that only two recent years, 2015 and 2023, saw food inflation above 7 per cent while agricultural growth fell below 3 per cent. In both years, rainfall was below 95 per cent of normal. The report noted that rainfall distribution, not just quantum, plays a crucial role, citing 2018 as a year of below-average rainfall that did not trigger inflation due to better spatial spread.
A weak monsoon affects rural incomes, compresses consumption demand, and pushes up prices of key perishables. Among vegetables, tomato prices are particularly sensitive to El Niño-linked rainfall patterns, while onions remain structurally volatile even in normal years. This food price pressure feeds into headline CPI, which SBI Research already expects to show an upward bias in Q2 and Q3 of FY27 due to imported inflation and supply disruptions from the West Asia conflict.
Icra also stated that a below-normal southwest monsoon forecast for 2026, coupled with the likely emergence of El Niño conditions, poses significant risks to India’s agricultural output and food prices in FY2027, according to a thematic outlook released by Icra. The report emphasised that agricultural outcomes in FY2027 will depend heavily on both the distribution and magnitude of monsoon rainfall, even as reservoir levels currently offer some cushion.
Sub-par rainfall is expected to affect kharif sowing, farm cash flows and agricultural output, with implications for food inflation. Icra projected that average Consumer Price Index inflation in FY2027 could exceed 4.5 per cent amid monsoon-related stress and the potential El Niño impact. Icra currently estimates agricultural gross value added (GVA) growth at around 3.0 per cent for FY2027, assuming a normal monsoon. However, it flagged “downside risks” to this projection arising from El Nino conditions and weaker rainfall.
The report noted that rural demand may remain upbeat in the first quarter of FY2027, supported by healthy rabi harvest cash flows that began in March 2026. Thereafter, rainfall patterns will become the key determinant of rural sentiment and consumption trends. Icra added that reasonable hikes in minimum support prices for kharif crops would be critical to protect farm sector sentiment amid multiple headwinds.
Despite these risks, the SBI report argued that structural changes in Indian agriculture may cushion part of the shock. The share of allied activities such as dairy, fisheries and horticulture in agricultural GVA has risen from 35 per cent in FY12 to around 46 per cent by FY24. Horticulture production has expanded significantly, implying that the farm economy is less monsoon-dependent than in the past. This diversification is expected to contain the overall growth impact.
From a fiscal perspective, the direct burden of drought on state finances may be limited. States spend only about 17.3 per cent of disaster expenditure on drought relief, and with the Centre now contributing 75 per cent of disaster response funds — and 90 per cent for northeastern states, the estimated fiscal hit from drought is around Rs 7,000 crore. However, the report cautions that politically driven farm loan waivers in response to rural distress could strain state budgets more significantly.
SBI Research retains its baseline GDP growth projection for FY27 at 6.8 to 7.1 per cent, driven by strong domestic consumption, infrastructure investment and services momentum. But it flags geopolitical tensions, elevated oil prices, supply chain disruptions and El Niño as key downside risks to this trajectory.
The broader concern is that climate risks are emerging at a time when India is already navigating external shocks from energy prices, trade disruptions and capital flow volatility. In this environment, even a 20 bps hit to GDP from a climate-agriculture channel becomes macro-relevant. |
