West Asia Crisis May Trigger Supply Shock, Warns Finance Ministry

The ministry noted that repairing damage to oil and gas production and supply infrastructure in the Gulf region may take several months.

It stated, "Repairing the damage to the oil and gas production/supply infrastructure in the Gulf region may take several months. If such a gradual recovery is not supported by a good kharif output (a weather shock /below normal monsoon as predicted by the IMD - possible El Nino conditions), it is likely that the price shock felt at the headline inflation might spill over to the core measure through the cost-push channel".

It further stated that if the delayed recovery coincides with a weak kharif season due to below-normal monsoon conditions, inflationary pressures could intensify. The India Meteorological Department (IMD) has indicated possible El Nino conditions, which could lead to lower rainfall across most districts.

The report said that India is entering FY2026-27 at a time of domestic strength but facing external challenges. The economy recorded a real GDP growth of 7.6 per cent in the previous fiscal year, supporting a growth forecast of 7-7.4 per cent for the upcoming year.

However, the outlook has become uncertain due to the impact of the West Asia conflict.

The ministry highlighted that a supply shock is already visible in the economy, with rising prices and potential demand compression emerging as key concerns. Higher input costs, particularly from the petroleum sector, are expected to affect a wide range of industries.

It added that inflation could turn into cost-push inflation as businesses pass on higher costs to consumers in order to protect margins. Given that many downstream industries rely on petroleum products, the impact of higher energy prices is likely to be widespread.

The report also pointed out that the West Asia conflict poses risks not only to inflation but also to trade and financial flows. At the same time, India's domestic demand, policy support, resilient financial system and continued public investment offer some protection against external shocks.

However, the ministry said it remains uncertain whether these factors will be sufficient if disruptions in energy and fertiliser supplies continue for a prolonged period.

It also flagged additional risks from weather conditions, noting that the expected El Nino could lead to below-normal rainfall, which may further push up inflation and widen fiscal and external deficits, while also affecting economic growth.

- ANI