India's FY27 GDP Growth Forecast Cut to 6.8-6.9% on Energy Woes

According to a report by the bank, the economic outlook has shifted as global oil prices and supply chain blockades begin to weigh on domestic production.

The revised forecast of 6.8-6.9 per cent relies on the assumption that oil prices eventually settle around USD 85 per barrel as supply lines improve.

The report highlighted that before the start of this conflict, the domestic growth outlook looked far more optimistic. Data from the new GDP series indicated that the economy grew by 7.8 per cent year-on-year in the third quarter of the 2026 fiscal year, with the financial year-to-date growth revised to 7.6 per cent.

High-frequency indicators through February, including automobile sales and bank credit, suggested that growth momentum remained robust before geopolitical tensions intervened.

However, the advent of war has severely impacted the supply of energy products, particularly liquefied natural gas and liquefied petroleum gas. This strain is already visible in industrial data.

The Manufacturing PMI for March showed an immediate impact, with the index decelerating to 53.9 from 56.9 in the previous month. "Even during 2022 when energy and gas prices rose, India's manufacturing sector activity did slow down to -1.7% in FY23 from 10% in FY22," the report said.

"Given supply constraints for industrial energy, household demand is being prioritized but there is cutback in supply of industrial use which is likely to impact production in sectors such as fertilizer, ceramics, restaurants, metals and glass among others," the ICICI Bank report noted.

The report further stated that apart from lower output, margins for the corporate sector will be impacted, as was seen in FY23 due to the Russia-Ukraine conflict, thereby impacting Gross Value Added growth.

"Historical data of oil prices and GDP show that only periods of exceedingly higher oil prices have a material impact on real GDP. When oil prices increased from ~USD 63/bbl. between 2015-19 to USD 85/bbl. in 2023- 25, real GDP growth was largely unchanged (7.4-7.2%). However, when oil prices averaged USD 111/bbl. during 2012-14, real GDP was considerably lower at 5.7%," the report added. "Most of the impact is likely to be felt in Q4FY26 and Q1FY27 when supply constraint is likely to impact production."

External trade faces additional hurdles as the blockade of the Strait of Hormuz impacted exports to the GCC nations, which constitute 15 per cent of overall exports. This comes after the export sector briefly found relief following a trade deal with the US and a US Supreme Court ruling declaring "certain tariffs illegal."

While supply lines are expected to inch toward normalcy in the coming weeks, near-term growth remains under pressure.

"Near-term growth will surely be impacted as global oil price has averaged around USD 100/bbl. since the start of this conflict, and these levels are detrimental to growth," the report stated.

- ANI