Global geopolitical tensions are starting to impact India’s economic prospects, with GDP growth forecasted at 6.2% for FY2027, according to a report by Morgan Stanley. Despite challenges like rising energy costs and supply disruptions, India is anticipated to sustain steady growth. However, this projection is a slight decrease from previous estimates of 6.5%, mainly due to higher crude oil prices averaging around $95 per barrel.
The report highlights that expensive energy imports are driving up production costs for businesses, fueling inflation, and exerting pressure on the Indian rupee. Economic expansion is expected to slow down further in the short term, potentially dropping to 5.9% year-on-year in the June 2026 quarter. This deceleration is likely to be influenced by subdued industrial activity, stricter financial conditions, and narrowing profit margins.
Despite the near-term slowdown, the report suggests that growth could gradually rebound as supply conditions improve and government support initiatives take effect. Inflation is also projected to climb, with average consumer price inflation estimated at 5.1% in FY2027. The anticipated rise in inflation is attributed to higher input expenses, currency devaluation, and stable food and commodity prices.
If oil prices surpass $110 per barrel, additional pressures may arise, leading to potential hikes in retail fuel prices and broader inflationary impacts. India’s external position is expected to face strain, with the current account deficit forecasted to expand to 2.5% of GDP, primarily due to increased oil import bills. The report warns that unless capital inflows match this deficit, the balance of payments could remain negative for a third consecutive year, intensifying pressure on the rupee.
To address these challenges, policymakers are likely to initially employ fiscal measures, including increased subsidies and cost-control measures, potentially raising the fiscal deficit to around 4.3% of GDP.
