By T N Ashok
Only six months ago, India appeared to be enjoying what Reserve Bank of India Governor Sanjay Malhotra described as a “Goldilocks moment” — inflation was under control, growth was among the highest in the world, foreign exchange reserves were comfortable, and the Narendra Modi government was preparing to enter the second half of its third term from a position of economic strength.
Today, that picture has changed dramatically. The prolonged Iran conflict, disruption of oil supplies through the Strait of Hormuz, and the resulting spike in global energy prices have emerged as the biggest external shock to hit India since the COVID pandemic and the Russia-Ukraine war. For an economy that imports nearly 90 percent of its crude oil requirements, the consequences are proving severe.
The Reserve Bank of India has already reduced its FY 2026-27 growth forecast from 6.9 percent to 6.6 percent while simultaneously raising its inflation projection to 5.1 percent. Markets are increasingly betting that further monetary tightening may become necessary if oil prices remain elevated and supply disruptions continue.
The closure and disruption of shipping routes through the Strait of Hormuz has exposed India’s greatest economic vulnerability: dependence on imported energy. This is the OIL SHOCK hitting the economy below the belt.
Global crude prices surged close to $120 per barrel after the conflict erupted and, despite some recent easing, remain significantly above pre-war levels. India’s oil and gas import bill reportedly jumped by more than 50 percent in April alone compared with March.
Higher oil prices feed directly into transport costs, manufacturing costs, fertiliser prices and ultimately food inflation. Every major sector of the economy feels the impact. The danger is not merely inflation. It is stagflation — slower growth combined with rising prices. India’s economy grew approximately 7.7 percent in FY26, one of the strongest performances among major economies.
Yet the FY27 outlook is markedly weaker. HSBC has projected growth could slow to around 6 percent under a prolonged energy shock scenario, while the RBI’s official estimate stands at 6.6 percent.
The Modi government’s long-term economic strategy has rested on transforming India into a global manufacturing hub through Production Linked Incentive (PLI) schemes, infrastructure spending and supply-chain diversification away from China.
Yet manufacturing remains weaker than policymakers had hoped. Manufacturing and slow growth is causing tremendous concerns to economists. Private investment has been uneven, exports are facing weak global demand, and small and medium enterprises continue to struggle with high borrowing costs and uncertain demand conditions.
Employment remains perhaps India’s most politically sensitive challenge. Despite headline GDP growth, unemployment and underemployment among young Indians remain persistent concerns. Graduate unemployment is significantly higher than national averages, and many jobs being created are informal, low-paying or lacking social security protections.
A prolonged oil shock threatens to worsen the situation by raising costs for manufacturers while simultaneously reducing consumer spending power. In effect, businesses face higher input costs while consumers face higher living costs — a toxic combination for job creation.
The Reserve Bank of India finds itself trapped between competing priorities. Right now the board is doing a delicate balancing act. Keeping monetary policy under wraps and interest rates under control. Any loosening could prove disastrous. Tightening interest rates would put away investors and growth would suffer.
Ordinarily, slower growth would justify lower interest rates. However, inflationary pressures from oil, fertilisers and food supplies make aggressive rate cuts risky. Consequently, the Monetary Policy Committee has chosen to keep the repo rate unchanged at 5.25 percent while maintaining a neutral stance. The central bank is attempting to prevent inflation expectations from becoming entrenched without crushing economic growth.
The RBI has also undertaken measures to defend the rupee and manage liquidity pressures. Its objectives are straightforward: Prevent excessive rupee depreciation. Preserve foreign exchange reserves. Reduce speculative pressure against the currency. Ensure sufficient dollar liquidity.
The challenge is formidable because higher oil prices naturally increase India’s demand for dollars, putting pressure on the rupee. Recent reports suggest that easing oil prices linked to possible diplomatic progress between Washington and Tehran have temporarily strengthened the rupee. However, analysts warn that only a lasting settlement can provide durable relief.
The Modi government now faces a second dilemma. Government finance has come under tremendous pressure in the wake of the complications created by the Iran war. Should it protect consumers through subsidies and tax reductions, or protect fiscal discipline? Thus far, New Delhi has attempted both.
Fuel taxes have been reduced, fertiliser subsidies increased, and public-sector oil companies have been discouraged from fully passing higher import costs on to consumers. But these measures come at a price.
The fiscal deficit target for FY27 was 4.3 percent of GDP. Increasingly, economists believe the actual figure could approach 4.7 to 5 percent. Some reports suggest the government is already preparing for a deficit as high as 4.8 percent. A larger deficit means higher government borrowing, reduced fiscal flexibility and potentially higher interest rates in future.
Paradoxically, while the economic outlook has darkened, Narendra Modi’s political position appears stronger than it did a year ago. HIs political fortunes have brightened on the one hand with Tamil Nadu and West Bengal falling — but the inflation, threatening to become stagflation, could upset the apple cart before 2029 general elections.
The BJP’s unexpected victories in key state elections have altered the national political narrative. West Bengal, long regarded as the citadel of regional politics under Mamata Banerjee, has witnessed a dramatic weakening of the Trinamool Congress following electoral setbacks and internal rebellions.
Simultaneously, the BJP’s success in dislodging a major Dravidian formation in the South has strengthened perceptions that Modi remains the country’s dominant political figure. The next major tests arrive in Uttar Pradesh and Punjab.
UP remains the BJP’s most important electoral battleground because of its massive Lok Sabha contribution, 80 seats. Punjab presents a more difficult challenge given the BJP’s historically weaker presence there. Beyond that lie Uttarakhand and a series of assembly contests that will shape momentum heading into the 2029 general election.
Recent India Today-CVoter surveys have projected the NDA winning between 330 and 350 seats if elections were held immediately, while the INDIA alliance remains well below a majority. However, Indian political history suggests caution.
Opinion polls conducted three years before a general election are poor predictors of eventual outcomes. Several variables could reshape the landscape before 2029:; Economic growth trajectory.; Inflation and fuel prices.; Employment generation.; Rural distress.; Opposition unity.; Regional alliances.; International crises.
At present, the opposition lacks a coherent national narrative capable of matching Modi’s personal popularity. Yet economic distress has historically been one of the few factors capable of eroding seemingly impregnable political dominance.
The central question is whether India can avoid stagflation. The road to 2029 appears chequered now. If oil prices moderate and supply chains normalise, growth around 6.5 percent remains achievable. India would still be among the world’s fastest-growing major economies.
However, if the Iran conflict drags on, energy prices remain elevated and El Niño disrupts agricultural production, India could face slower growth, higher inflation and greater fiscal stress simultaneously.
For Narendra Modi, the challenge is therefore twofold. Politically, he remains the strongest leader in the country and enters the next electoral cycle from a position of advantage. Economically, however, the environment is becoming significantly more difficult.
The years between 2026 and 2029 may determine whether India sustains its rise as the world’s fastest-growing major economy or enters a period of slower growth, persistent inflation and mounting political pressure.
For now, India’s Goldilocks moment appears to be over. (IPA Service)
