Indian officials say the Iran war could be as disruptive to the economy as the Covid pandemic was six years ago and the damage could linger for years to come, threatening to knock the world’s fastest-growing major nation off its path.
The government is now drawing on its Covid playbook to cushion businesses and consumers hit by gas shortages and soaring oil bills. One such measure could be a credit guarantee scheme worth ₹2-2.5 lakh crore for small and medium firms and sectors, officials in New Delhi directly involved in managing the fallout said, asking not to be identified because the discussions are private.
Reliance on imports
India’s reliance on energy imports — it’s the world’s third-largest oil consumer and gets about 90% of its gas from the Middle East — may make the Iran war as disruptive as the Covid pandemic six years ago, the officials said. Even if hostilities end soon, it could take years for supplies of energy products including liquefied petroleum gas to normalize as Gulf nations repair damaged facilities, they said.
The Finance Ministry has mapped out multiple scenarios, including one that assumes crude oil prices average $120 a barrel for the full year, they said.
The crisis has the potential to knock India off its growth trajectory. Although the government is sticking to its forecasts of 6.8%-7.2% for the fiscal year through March 2027, several economists have already started to downgrade their projections. Goldman Sachs Group Inc. predicts 5.9% for 2026, while Oxford Economics Ltd. expects 6.2%.
Policymakers see India’s potential growth rate at 7-7.5%, with scope to reach 8% without repeated shocks, the minimum needed to meet Prime Minister Narendra Modi’s economic agenda.
Multiple channels are under strain at once, including the rupee, household purchasing power, Gulf remittances, fiscal space and private investment, said Alexandra Hermann, an economist at Oxford Economics. “The vulnerability is unusually broad-based,” she said.
For now, the shock looks cyclical rather than structural, “but if high energy costs, subsidy pressures, and delayed private capex persist, then some of the cyclical damage could start bleeding into potential growth as well,” she said.
Since Feb. 28, when the US and Israel launched joint attacks on Iran, Prime Minister Narendra Modi’s government has taken several fiscal steps to shield consumers and support the economy. Officials say they have enough fiscal room to maneuver following years of spending restraint.
The government has slashed taxes on diesel and gasoline to help keep prices stable at the pump, and providing a relief package to exporters catering to the Middle East region. It has also set aside an economic stabilization fund of $6.2 billion to help the economy absorb global shocks.
The proposed loan program now under consideration for small businesses would be similar to the one launched during the pandemic in May 2020 and offer 100% guaranteed and collateral-free loans to help firms cope with any liquidity crunch, officials familiar with the matter said.
India’s Finance Ministry didn’t respond to a request for comment.
During the pandemic, the fiscal deficit widened sharply to 9.5% of GDP in 2020-21 as the government rolled out stimulus. Combined support from the government and the RBI totaled ₹29.87 lakh crore ), or about 15% of GDP, with measures including a loan repayment moratorium, corporate tax cuts and free food grains for migrant workers.
For the current financial year, Finance Minister Nirmala Sitharaman targeted a fiscal deficit of 4.3%, but economists such as Anubhuti Sahay of Standard Chartered Plc. expect that to widen by 0.7 to 0.9 percentage point to above 5% of GDP after absorbing higher oil prices.
Officials said budgetary projections for the current fiscal year may change due to the crisis, but the exact impact would only be clear in the second half of the year, once the government has enough data to assess.
The combination of a surging energy import bill and a widening fiscal deficit is worrying foreign investors. Overseas funds have pulled nearly $19 billion from local markets in the first few months of the year, close to the full-year record for 2025. That’s pushed the rupee past an all-time low of 95 per dollar, prompting the central bank to take some of its most aggressive steps in a decade to curb banks’ speculative bets.
The hit to both the economy and budget mainly comes from the spike in oil prices, which the government is absorbing for now. But that may not remain the case if the strait remains shuttered and prices stay elevated.
“If the supply shock deepens, a gradual increase in retail fuel prices might be the next step,” said Radhika Rao, an economist at DBS Bank Ltd. That could lead to “some degree of demand destruction,” similar to what was seen in 2022 after Russia’s invasion of Ukraine.
Further clouding the outlook, inflation edged up in March amid concerns of below-normal monsoon rainfall. The Reserve Bank of India kept interest rates on hold last week and struck a cautious tone as growth comes under pressure. Some banks like Goldman Sachs and Standard Chartered say chances of rate hikes have increased as inflation pressure gain.
Modi’s Principal Secretary Shaktikanta Das, who in his earlier role as central bank governor dealt with the Covid pandemic, said last week that the recent hostilities in the Gulf, combined with the blockade of the Strait of Hormuz, “have revived memories of demand destruction and severe supply-side disruptions seen during Covid.”
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