New Delhi: India’s economy faces a substantial hit from energy shocks and trade disruptions caused by the West Asia conflict.
The Indian economy is likely to grow at 6.6% in financial year 2026-27 (FY27), slowing from an estimated 7.6% expansion for the year ended March, reflecting headwinds from the , the World Bank said in its South Asia Economic Update on Wednesday.
The multilateral agency’s estimate is slightly lower than the 6.9% pace projected by the Reserve Bank of India (RBI) in its statement and the government’s estimate of 6.8-7.2% made in January before the US and Israel began pummelling Iran on 28 February.
Although last year’s reduction in goods and services tax (GST) should continue to support consumer demand in the first half of FY27, elevated global energy prices are expected to fuel inflation and constrain households’ disposable incomes, the World Bank said.
“Government consumption growth is expected to soften to offset higher subsidy outlays for cooking fuel and fertilizers. Investment growth is likely to moderate amid elevated uncertainty and rising input costs,” it said. Improved access to the US and the European Union (EU) for India’s exports will be undermined by slower growth in major trading partners, it added.
India announced and the US earlier this year after signing one with the UK last year.
The multilateral agency pointed out that strong domestic demand and export resilience were behind India’s growth accelerating from 7.1% in FY25 to 7.6% in the financial year ended March.
Private consumption growth was particularly robust, supported by low inflation and rationalization of the GST, it said.
“The World Bank’s 6.6% growth projection for FY27 reflects the geoeconomic recalibration from sustained $90-100/barrel oil, not fundamental weaknesses in India’s growth story. Every $10/barrel increase possibly shaves 30-40 basis points off GDP, making this downgrade almost entirely attributable to exogenous energy shocks,” said Rishi Shah, partner and economic advisory services leader, Grant Thornton Bharat.
“India’s underlying demand dynamics remain robust—GST rate cuts supporting consumption, credit growth and infrastructure capex creating sustained multipliers. These provide structural tailwinds independent of recent economic volatility,” he added.
Rumki Majumdar, economist at Deloitte India, said that recent FY27 growth forecasts for India, ranging from the RBI’s 6.9% to the World Bank’s 6.6%, reflect a cautious approach to the outlook of the economy due to the evolving global landscape.
“Energy price volatility and supply chain disruptions are beginning to transmit into domestic variables such as inflation, currency stability, and external balances. While this does test the narrative of India’s economic resilience, the recent ceasefire-led correction in oil prices offers near-term relief,” she said.
Majumdar said the West Asia tensions are likely to gradually ease, and these headwinds are likely to be transient and concentrated in the near term, opening the door for stronger growth momentum and possible upward revisions ahead.
“If geopolitical conditions stabilize, we expect the impact to remain largely contained to the first quarter, with potential for an upward revision in growth as macro pressures ease,” she added.
The World Bank pointed out that South Asia is growing faster than any other region, and much of that acceleration is driven by reforms that reduce the role of the state—opening up markets, simplifying regulations and building infrastructure. The trade deal between India and the EU is a positive signal that, while others are withdrawing from global trade, South Asia is comfortable charting its own course, facing competition with confidence.
The Bank pointed out that the revision in India’s GDP computing methodology and base year change have shown that the economy was slightly smaller than previously thought, but recent growth has been faster.
Domestic demand has remained strong, with retail sales robust and consumer confidence hitting a post-pandemic high in November 2025, the report said. Recent reforms to simplify and reduce taxes have also supported private consumption, the report added. Last year, India reduced both income taxes as well as GST to stimulate demand.
Growth in South Asia is expected to slow to 6.3% in 2026 from 7% in 2025 due to disruptions in global energy markets, but is expected to recover to 6.9% in 2027, it said.
Despite the near-term slowdown, South Asia continues to grow faster than other emerging-market and developing economies. “The growth outlook is driven primarily by India’s performance, underpinned by robust domestic demand as well as tariff cuts and recent trade agreements, including the free trade agreement with the European Union,” the World Bank said.
A prompt resolution to the West Asia conflict would lift growth prospects, while further dislocation in global energy markets could raise inflation, necessitate monetary policy tightening, and dampen remittances, it said.
Despite a challenging global environment, South Asia’s growth prospects remain strong, the World Bank said in a statement quoting its vice-president for South Asia, Johannes Zutt.
“Countries need to implement critical policy reforms to sustain growth, create jobs, and increase resilience to shocks. Cross-cutting policies to improve public infrastructure, remove trade barriers, foster business-enabling environments, and mobilize private capital can diversify sources of growth and also create the jobs that are needed to reduce poverty and share prosperity,” Zutt said.
Separately, the International Monetary Fund (IMF) said in its World Economic Outlook, released in part on Wednesday, that rising geopolitical tensions and security concerns are prompting governments to reassess priorities and increase defence spending.
Beyond their devastating human toll, wars impose large and lasting economic costs, and pose difficult macroeconomic trade-offs, especially for those countries where the fighting is taking place, the IMF said. Even without active conflicts, rising defence spending can raise economic vulnerabilities in the medium term, it said. The Fund’s full report will be released later this month.