India’s economic growth is set to cool at the end of FY2026 and slow further in FY2027 as elevated crude oil prices linked to the West Asia conflict cloud the macro outlook, according to a preview by Icra.
The ratings agency expects gross domestic product growth to ease to about 7.0 per cent in Q4 FY2026 from 7.8 per cent in Q3, marking a three-quarter low and coming in below the National Statistical Office’s implicit projection of 7.3 per cent for the quarter.
For the full year, Icra projects GDP growth of 7.5 per cent in FY2026, marginally lower than the NSO’s second advance estimate of 7.6 per cent. However, nominal GDP growth is seen at about 8.9 per cent, higher than the NSO’s 8.6 per cent estimate, reflecting price pressures.
The sharper concern lies ahead. Icra has cut its baseline GDP growth forecast for FY2027 to 6.2 per cent from 6.5 per cent earlier, citing persistently high crude oil prices, risks to rural demand from a weak monsoon outlook, and the broader macro impact of the West Asia conflict.
Crude prices in the Indian basket surged to USD 114.5 per barrel in April 2026 following supply disruptions after the escalation of the conflict, before easing to USD 106.7 per barrel in early May. Icra now assumes average crude prices of about USD 95 per barrel in FY2027, up from its earlier assumption of USD 85, with prices staying elevated above USD 100 in the first half before moderating to around USD 80 in the second half.
This stickiness in energy costs, the agency said, poses risks to investment demand, corporate profitability and consumer sentiment, and threatens to transmit a supply shock into a broader demand slowdown over time.
Icra estimates that the oil shock and associated fiscal measures could result in a net fiscal slippage of Rs 1,150 billion in FY2027, equivalent to 0.3 per cent of GDP. The impact includes higher fertiliser and fuel subsidies, lower excise collections and weaker tax revenues, partly offset by higher customs duties on gold and silver and support from the Economic Stabilisation Fund.
As a result, the fiscal deficit is projected to widen to 4.7 per cent of GDP in FY2027, compared with 4.5 per cent in FY2026. Under a more adverse scenario of crude at USD 105 per barrel, GDP growth could slow to 5.8 per cent while the fiscal deficit could widen to 5.0 per cent of GDP.
Inflation pressures are also expected to intensify. Icra sees consumer price inflation rising to 4.7 per cent in FY2027 from 2.1 per cent in FY2026, while wholesale price inflation could climb to 6.6 per cent from 0.7 per cent. The current account deficit is projected to widen to 2.0 per cent of GDP from 0.9 per cent.
Despite these pressures, Icra expects the Monetary Policy Committee to remain on hold in its June 2026 review after keeping the policy repo rate unchanged at 5.25 per cent in April.
The agency said the West Asia conflict has so far manifested primarily as a supply shock, raising energy prices and input costs while domestic demand has remained relatively resilient. However, if the shock persists, it could weaken incomes, consumer confidence and investment, leading to stagflationary risks.
Given that CPI inflation is likely to remain around the mid-point of the MPC’s target range in May 2026 and growth risks are tilted to the downside, policymakers are expected to exercise caution while assessing the evolving geopolitical situation.
High-frequency indicators suggest a mixed picture at the end of FY2026. Manufacturing activity remains in expansion mode, though PMI readings have softened, while capital goods output, vehicle production and infrastructure indicators such as cement, steel and construction goods show robust growth. Services indicators, including GST e-way bills, freight traffic and credit growth, also point to steady underlying momentum.
However, agriculture growth has moderated sharply, and merchandise exports remain volatile, underscoring the fragility of external demand conditions.
Icra contrasted the current episode with the Covid-19 shock, noting that while the pandemic led to a demand slump and contraction, the present crisis is a supply-driven shock that risks pushing up inflation while slowing growth and widening the current account deficit.
The agency’s outlook suggests that India’s growth trajectory in FY2027 will depend heavily on how quickly crude prices moderate, the evolution of the West Asia conflict, and the monsoon’s performance, all of which will shape rural demand, inflation dynamics and policy responses. |
