Moody's Ratings has significantly lowered India's financial year 2026-27 (FY27) growth forecast to 6 per cent from 6.8 per cent, citing the adverse economic impact of the West Asia conflict, which is leading to weaker consumption, industrial activity, and elevated energy prices.
Key Points
- Moody's Ratings has revised India's FY27 GDP growth forecast downwards to 6 per cent from 6.8 per cent.
- The downgrade is primarily due to subdued private consumption, softer industrial activity, and increased energy and input costs linked to the West Asia conflict.
- Disruptions to energy supplies, particularly through the Strait of Hormuz, are expected to inflate India's import bill and widen its trade deficit.
- Higher energy costs are projected to fuel inflation and strain government finances, potentially increasing spending on fuel and fertiliser subsidies.
- Oil marketing companies (OMCs) and fuel-dependent industries like cement, chemicals, and fertilisers are expected to be most affected by rising costs.
Moody's Ratings on Tuesday downgraded India's growth forecast for financial year 2026-27 (FY27) to 6 per cent from the previously estimated 6.8 per cent, citing weaker consumption and industrial activity amid elevated energy prices and rising input costs following the West Asia conflict.
"In light of India's economic exposure to the military conflict in the Middle East (West Asia), we expect real GDP (gross domestic product) growth to ease to 6 per cent in FY27, from an earlier projection of 6.8 per cent, driven by more subdued private consumption and softer industrial activity amid elevated energy prices and higher input costs," said the Moody's report, titled "Middle East Conflict – India: Energy shock fuels external, inflationary and sectoral risks".
Impact on Trade and Fiscal Balances
Disruptions to energy supplies, particularly through the Strait of Hormuz, have sharply increased oil and gas prices, raising India's import bill and widening its trade deficit, the report said.
As a major importer of crude oil, liquefied natural gas (LNG), and liquefied petroleum gas (LPG), India remains vulnerable to sustained price pressures, it added.
Moody's said higher energy costs are expected to push up inflation and strain fiscal balances, as the government may need to increase spending on fuel and fertiliser subsidies.
"Fertiliser and cooking gas shortages will constrain agricultural activity and household consumption, key components of India's economy," the report said.
External pressures could intensify if remittance inflows from Gulf Cooperation Council (GCC) countries weaken, it said, adding that these account for over one-third of India's total remittances and any slowdown in the region could further widen the current account deficit (CAD) alongside higher import costs.
"A more prolonged disruption in economic activity in the GCC will weigh on remittance inflows that coupled with a wider trade deficit will worsen India's current account deficit.
"These pressures will compound pre-existing rupee depreciation that prompted foreign-exchange intervention by the central bank," said the report.
Sectoral Vulnerabilities and Resilience
At the sectoral level, Moody's said oil marketing companies (OMCs) and fuel-dependent industries are expected to be the most affected.
State-run OMCs are incurring under-recoveries of Rs 15-20 billion per day with a combined Ebitda (earnings before interest, taxes, depreciation, and amortisation) of about Rs 900 billion in FY25, as higher crude costs are not fully passed on to consumers, the report noted.
Moody's added that higher global commodity prices, combined with rupee depreciation, are expected to add to inflationary pressures, although the impact on consumers has so far been partly contained by fuel subsidies absorbed by OMCs.
However, this has shifted the burden onto public finances, potentially weighing on fiscal consolidation, it added.
"Cost hikes associated with inland transportation have been contained for now through fuel subsidies borne by state-owned OMCs, but this has shifted cost pressures onto their balance sheets in a manner we view as unsustainable.
"Most companies are still exposed to higher shipping or airfreight costs," the report said.
Energy-intensive sectors such as cement, chemicals, and fertilisers are also likely to face rising input and logistics costs, while gas supply disruptions have led to rationing in some cases, said the report.
Airlines face a dual shock from higher jet fuel prices and disruptions to international routes, with temporary domestic price caps offering limited and uncertain relief, it added.
"By contrast, most infrastructure and utility companies will remain resilient.
"Infrastructure and utility companies with regulated returns or access to domestic fuel sources remain largely insulated," the report noted.
