Prolonged Iran crisis could affect rupee, CAD, inflation, but reforms, trade deal raise FY27 GDP outlook to 7-7.4%: Govt

India’s reform momentum and recent free trade deals have raised its FY27 growth outlook to 7-7.4%, up from the 6.8-7.2% projected in the Economic Survey this year, but a prolonged Iran crisis could have implications for exchange rate, current account deficit, capital flows, inflation and sectors like fertilizers and petrochemicals that are dependent on imported liquified natural gas (LNG) and crude oil, the Union finance ministry said.

The ministry's monthly economic review released on Friday said the developments around the Iran war—disrupted shipping through the Strait of Hormuz and damage to key energy infrastructure assets in West Asia—mark a pivotal escalation echoing the 1991 Gulf War oil shocks, potentially reshaping global energy geopolitics for decades.

The review, prepared by the Department of Economic Affairs, noted that the conflict has already driven Brent crude up around 9% to near $80 a barrel and LNG prices by around 50%. Despite India’s high import dependency on crude oil, it has sufficient foreign exchange reserves, a low current account deficit (CAD), which stands at 0.8% of GDP in the first half the current fiscal, and low inflation rates, which collectively allow it to effectively mitigate the impacts of rising global crude oil prices and ensure domestic energy security, the review noted.

'Material implications'

“However, if the crisis persists, it could have material implications for the exchange rate and the CAD and could stoke inflationary pressures (which otherwise have supportive supply-side dynamics),” the review said.

“Subdued capital flows, accentuated by a flight to safety, could put pressure on the currency. Some sectors dependent on LNG and crude, like fertilizers and petrochemicals, could be affected if the crisis is prolonged,” the review pointed out.

The review pointed out that the policy framework outlined in the Union Budget 2026-27 offers a strong anchor for sustaining growth by combining continued fiscal consolidation with sustained capital expenditure and sector-focused initiatives covering manufacturing, agriculture, small businesses, infrastructure and human capital development.

Productivity push

The ministry reckons that this will help boost productivity, investments and job creation. Although external factors like global growth conditions, trade dynamics, commodity price fluctuations and geopolitics will continue to shape the growth outlook, strong macroeconomic fundamentals and continued reform momentum position India’s economy well for expansion, the review said.

“In view of positive developments, including recent successful trade deals and consecutive strong growth of more than 7% over the previous three years, real GDP growth has been upgraded to 7.0-7.4% for FY27,” the review said.

It, however, emphasized the point highlighted in the Economic Survey this year—India’s shock-absorbing capacities, if strengthened by proactive and entrepreneurial governance characterized by speedy decision-making, among other things, may become more priceless for investors, doing away with much of the potential stress to balance of payments.

“Even better, it may result in bigger capital inflows, accelerating investment and growth in the process, in an otherwise challenging environment,” the review said.

GDP compression

It also pointed out that the compression of GDP in nominal terms in the new GDP series released last month translates the 4.4% fiscal deficit target of FY26 to 4.5%.

The fiscal deficit for FY27, now projected at 4.3%, would amount to 4.46% of projected GDP, assuming the same nominal GDP growth rate of 10 per cent, the review noted.

The new series with 2022-23 as base year had reduced the size of India’s economy by more than ₹11 trillion to ₹345.47 trillion compared to the earlier projected level under the earlier series with 2011-12 as the base year.