NEW DELHI: The West Asia war is likely to have a limited impact on India’s economy and although inflation could accelerate from the level in March, it will stay within the central bank’s tolerance range, S. Mahendra Dev, chairman of the Economic Advisory Council to the Prime Minister, said in an interview.
The economy is likely to expand 7% this year, and the Iran war has re-emphasized the need for faster diversification of energy sources, Dev said.
Atmanirbharta or self-reliance is at the centre of India’s strategy to navigate a global environment riddled with economic choke points, Dev said.
Growth, inflation
Dev said the economy’s resilience in the face of headwinds generated by the West Asia war could be demonstrated by the narrowing of India’s trade deficit to $20.67 billion in March.
“This shows that the impact of the war is being mitigated by a good export performance to a diversified set of markets. Oil prices remain elevated but are off their March highs. Growth is likely to remain around 7%. However, this would also depend upon how long the conflict lasts,” Dev said. “The inflation environment was benign domestically and this provides some buffer to absorb rising costs of energy, especially oil.”
Dev’s outlook of 7% real GDP growth compares with the Reserve Bank of India’s projection of 6.9% on 8 April and the International Monetary Fund’s 6.5% forecast earlier this month. The Economic Survey presented in January projected a 6.8-7.2% growth for FY27.
“India’s exposure to geopolitical shocks is relatively contained as economic growth is anchored primarily in domestic consumption and investment rather than external demand. This resilience is further reinforced by proactive policy interventions. The establishment of an Economic Stabilisation Fund with an initial corpus of ₹57,381 crore provides an additional buffer against external volatility,” Dev said.
Efforts to diversify energy import sources, expand petroleum reserves and secure long-term fuel supply agreements have reduced vulnerability to supply-side disruptions, Dev said. Comfortable fertilizer stock levels, supported by long-term sourcing arrangements, continue to underpin farm production stability and food security, he said.
In March, inflation stood at 3.4% but the impact of higher oil prices may increase it to 4-4.5%, which would still be within the RBI’s tolerance range of 2% to 6%, Dev added.
“The RBI’s response is likely to be calibrated, given that this is a supply shock and this is what we saw during the April monetary policy. In terms of long-run rates, the yield on the 10-year bond rose above 7% in early April. However, it has declined to 6.87% since then. This indicates that long-term expectations of inflation by investors have adjusted up in a contained way,” he explained.
On 8 April, the RBI left its 5.25% repo rate unchanged while retaining the neutral monetary policy stance. Dev said sustained high growth is achievable through economic reforms, strong domestic demand, demographic advantages and improvements in infrastructure, manufacturing and services.
“In the last decade, we have seen significant reforms such as GST, , ease of doing business and tax reforms. At the same time, macroeconomic stability has been achieved through fiscal prudence and increase in capital expenditure. With regard to agriculture, the states have a major role to play. Thus, India’s growth is likely to be more balanced in the long run,” said Dev.
Dealing with the energy shock from the West Asia crisis is a top priority. India has committed to the vision of net zero emissions by 2070, and the recent events have “re-emphasized the importance of a diversified basket of sources of energy supply,” Dev said.
The Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India (SHANTI) Act, 2025, provides for participation of private companies in the sector, he said.
The prototype fast breeder reactor recently achieved criticality, an important milestone towards achieving long-term energy security, Dev added, while referring to the Centre’s policy initiatives to reduce dependence on oil, especially in the transport sector, with the use of biofuels, compressed biogas, sustainable aviation fuel and electric mobility push.
Economic choke points
Asked about how India should deal with trade, financial systems, technology, and energy becoming economic choke points, Dev said, “The vision of Atmanirbhar Bharat is essential precisely for this reason.”
Initiatives such as the National Critical Minerals Mission assume importance, Dev said.
“The green transition also requires securing supply of critical minerals and strengthening value chains. Along with mining and processing of these minerals, adopting a circular economy approach is important since this would reduce the need for mining or imports,” he said. “There should be efforts to develop technologies which are more suited to India’s resource endowment.”
India’s approach de-risks and shields against global headwinds and geopolitical uncertainties, Dev said, referring to India’s strategy of signing free trade agreements.
“We have been leveraging FTAs due to limited progress in WTO-led multilateral agreements. These FTAs diversify exports, secure raw materials and foster domestic manufacturing while safeguarding domestic industries,” he said.
China plus-one
To a question on whether the ‘’ strategy of global manufacturers still offers investment opportunities for India, Dev said India has a conducive environment for investors driven by ease of doing business, reduced logistic costs, a vast domestic market and increasing engagement with the global economy through free trade agreements.
“Recent initiatives such as labour laws and deregulation across a wide range of domains adds to India’s attractiveness. The electronics sector is an important example in this regard, where production has seen a six-fold increase over a decade and this is reflected in a significant increase in exports too,” said Dev.
Political resistance to migration in many advanced economies is likely to make mobility more selective rather than reverse it, with tighter controls on low-skilled labour and continued demand for high-skilled workers due to ageing populations and skill shortages, Dev explained.
“For India, there could be a two-way flow with migrants returning to explore domestic opportunities or more shorter-term migration abroad. It is important to note that the increasing role of services and knowledge-intensive industries are changing the way we conceive of labour mobility and this is being incorporated in trade agreements too,” said Dev.