The growth-inflation mix is set to worsen for India this fiscal year, largely due to the West Asia conflict and expectations of a sub-par monsoon — factors not in our control. The longer the conflict persists, the greater the risk to growth and upside to inflation.
To be sure, GDP growth was unscathed in 2025-2026, according to the latest estimates of the National Statistical Office (NSO), despite the tariff turbulence of 2025 and the conflict, which began towards the end of February this year.
The NSO now sees GDP growth for the year at 7.7 per cent, slightly higher than the second advance estimate of 7.6 per cent released in February. The print is above the potential growth rate of 7 per cent noted in the recent Economic Survey and much stronger than projected by policymakers and analysts at the beginning of the year.
The revision is not unusual, considering the February estimate was based on incomplete information for the fourth quarter. High-frequency indicators such as auto sales and retail credit growth indicate domestic demand held up during the quarter. But what really makes the performance stand out is a combination of sustained high growth — measured through rebased GDP — and benign inflation, at a lower-than-expected 2.1 per cent.
Several factors helped sustain growth despite adverse external conditions. The impact of high tariffs imposed by the US was lower than initially feared as exporters front-loaded shipments. Services exports remained robust, while exemptions for fast-growing sectors such as electronics helped limit the damage. Low crude oil prices and a normal monsoon — the “good luck” factor for India — supported growth and kept inflation under control.
Policy interventions contributed, too. Rate cuts by the RBI’s Monetary Policy Committee supported financial conditions and demand. Fiscal measures, including rationalisation of GST rates, income tax relief and an increase in direct benefit transfers at the state level, provided additional support. These measures helped strengthen household purchasing power and business sentiment. Private consumption and investments emerged as the primary drivers last year, growing at 7.7 per cent and 8.2 per cent respectively.
Cut to this fiscal year.
The ride is becoming more laboured. Growth expectations are being lowered as downside risks to the economy begin to materialise.
Crisil expects GDP growth to slow to 6.6 per cent from 7.7 per cent last year. The RBI, in its June monetary policy, also pared its growth outlook to 6.6 per cent, while keeping rates and stance unchanged. A slew of measures announced by authorities was aimed at encouraging foreign capital inflows, which, along with a depreciating rupee, have been a wrinkle in an otherwise healthy macroeconomic story.
Though the government is likely to maintain its investment momentum, a pick-up in private corporate investment will be delayed due to a highly uncertain environment.
Inflation, on the other hand, will move up to 5.1 per cent, with risks tilted to the upside. Despite the slowdown in real GDP, the nominal GDP growth is set to be higher due to higher inflation based on both the Wholesale Price Index (WPI) and Consumer Price Index (CPI).
The main reason for the worsening growth-inflation mix is the West Asia conflict that has brought a major energy shock and a wider trade disruption. It has led to a sharp rise in freight and insurance costs, intensified uncertainty and, coming on top of the unresolved tariff shock of 2025, rendered the external environment more challenging.
The expected slowdown in major export destinations, including the US, Europe and West Asia, will likely reduce opportunities for India’s goods exports. Also, the two favourable “good luck” factors that supported growth and kept inflation benign last year have turned adverse.
Crude oil is expected to average $90-95 per barrel this fiscal, compared with $70 last fiscal. India’s high dependence on imported energy increases its vulnerability to both price increases and supply disruptions. Higher costs reduce availability of energy at affordable prices and weigh on growth, particularly in manufacturing, construction and services such as travel, transport and restaurants.
The forecast of El Niño reducing rainfall to 90 per cent of the long-period average could become another headwind to both growth and inflation. Although the development of the Indian Ocean Dipole can provide some offset, it is a bit early to predict how this will play out. The risks from monsoons remain tilted to the downside.
Crisil’s Financial Conditions Index shows the conflict significantly tightened India’s financial conditions in March and April through capital outflows, sharp depreciation of the rupee and rising bond yields. Tighter financial conditions can affect borrowing costs, investment decisions and overall confidence.
The upside risks to inflation have started materialising, with the pressure currently more visible in wholesale inflation than retail inflation. WPI inflation, which is directly affected by global commodity shocks, came in at 8.3 per cent in April, while CPI inflation remained benign at 3.5 per cent.
We expect CPI inflation to rise to 5.1 per cent as manufacturers pass on higher input costs to consumers. The government has also begun passing through higher crude prices to petrol and diesel, which will have both direct and indirect effects on inflation. A weaker rupee further raises the risk of imported inflation.
Food inflation may also come under pressure due to disrupted agricultural production from heatwaves and expected below-normal rainfall. The household survey of inflation expectations released alongside the June monetary policy report suggests rising inflationary expectations.
On the positive side, Crisil Ratings notes that strong balance sheets, with the median debt-to-equity ratio currently at a low of 0.45, provide a cushion to a majority of medium and large corporates.
However, the policy space to support growth through easy monetary policy has evaporated because of rising inflation risks. Fiscal policy will need to balance several priorities: Supporting MSMEs, managing a higher fertiliser subsidy bill and accelerating efforts to improve energy security and affordability.
With the rising frequency of global shocks and geopolitical reset towards protectionism, this is the moment to activate medium-term growth drivers that are within domestic control. Removing the bottlenecks in the economy, fast-tracking ease of doing business and pushing ahead with remaining reforms will be crucial to revive private capex and realise the export potential of recently signed foreign trade agreements.
The writer is chief economist, Crisil
With the rising frequency of global shocks and geopolitical reset towards protectionism, this is the moment to activate medium-term growth drivers that are within domestic control. 
Share
