Chief Economic Advisor V. Anantha Nageswaran emphasized the need for India to capitalize on the impact of the West Asia conflict on its economy. He suggested that India should use this opportunity to intensify recent reform initiatives, aiming to boost the country’s competitiveness and readiness. Nageswaran highlighted the importance of fostering an ‘entrepreneurial mindset’ within the bureaucracy and enhancing decision-making speed to ensure India emerges stronger and more resilient from this challenging period.
The conflict in West Asia is expected to affect India through various channels, including supply disruptions to essential resources like oil, gas, fertilizers, and exports. Additionally, India may face higher import prices, increased logistics costs, and a potential decline in remittances from Indians working in Gulf countries. Nageswaran pointed out that these impacts could significantly influence growth, inflation, fiscal balance, and external balances in India.
In response to the crisis, India will need to provide immediate support to the most affected businesses and households while also creating fiscal space to address strategic long-term needs highlighted by the conflict. This includes the necessity to build reserves in various commodities beyond energy-related ones. The Chief Economic Advisor stressed the importance of re-prioritizing spending and offering targeted relief to the most vulnerable sectors in the economy.
India’s merchandise trade deficit exceeded $280 billion in 2024-25, equivalent to about 7.5% of GDP, and is expected to widen further in FY27, leading to an increase in the current account deficit. Nageswaran suggested that managing this deficit effectively will require a collaborative effort between the government, households, and businesses. Balancing the impact of higher import prices on end-users will be crucial to moderating demand growth and alleviating pressure on the current account.
The moderation of demand is also anticipated to alleviate the central bank’s dilemma regarding the appropriate monetary policy response to conflict-induced shocks. Nageswaran explained that if demand decreases due to higher prices, the central bank is likely to view the inflationary effects as a supply shock. However, if demand remains high, the central bank may need to monitor potential secondary effects of increased import costs on inflation and adjust policies accordingly. The Chief Economic Advisor highlighted the importance of carefully managing interest rates and material prices to ensure a balanced economic response to the ongoing global uncertainties and disruptions.
