NEW DELHI: Moody’s Ratings on Tuesday downgraded India’s growth forecast for FY27 to 6 per cent from 6.8 per cent estimated earlier, citing weaker consumption and industrial activity amid elevated energy prices and rising input costs following the Middle East conflict.
“In light of India’s economic exposure to the military conflict in the Middle East, we expect real GDP growth to ease to 6 per cent in fiscal 2026–27, from an earlier projection of 6.8 per cent, driven by more subdued private consumption and softer industrial activity amid elevated energy prices and higher input costs,” said the Moody’s report, titled “Middle East Conflict – India: Energy shock fuels external, inflationary and sectoral risks”.
Disruptions to energy supplies, particularly through the Strait of Hormuz, have sharply increased oil and gas prices, raising India’s import bill and widening its trade deficit, the report said. As a major importer of crude oil, liquefied natural gas (LNG), and liquefied petroleum gas (LPG), India remains vulnerable to sustained price pressures, it added.
Moody’s said higher energy costs are expected to push up inflation and strain fiscal balances, as the government may need to increase spending on fuel and fertiliser subsidies. “Fertilizer and cooking gas shortages will constrain agricultural activity and household consumption, key components of India’s economy,” it said.
External pressures could intensify if remittance inflows from Gulf Cooperation Council (GCC) countries weaken. These account for over one-third of India’s total remittances, and any slowdown in the region could further widen the current account deficit alongside higher import costs.
Despite these risks, Moody’s said India retains buffers in the form of strong services exports, sizeable foreign exchange reserves, and a stable domestic funding base, although a prolonged period of high energy prices could test macroeconomic stability and investor confidence.
At the sectoral level, oil marketing companies (OMCs) and fuel-dependent industries are expected to be the most affected. State-run OMCs are incurring under-recoveries of Rs 15–20 billion per day, with a combined EBITDA of about Rs 900 billion in FY25, as higher crude costs are not fully passed on to consumers.
Higher global commodity prices, combined with rupee depreciation, are expected to add to inflationary pressures, although the impact on consumers has so far been partly contained by fuel subsidies absorbed by OMCs. However, this has shifted the burden onto public finances, potentially weighing on fiscal consolidation.
“Cost hikes associated with inland transportation have been contained for now through fuel subsidies borne by state-owned OMCs, but this has shifted cost pressures onto their balance sheets in a manner we view as unsustainable. Most companies are still exposed to higher shipping or airfreight costs. A prolonged period of high energy prices will dampen consumer and market sentiment, constraining demand. Elevated energy prices have already fueled currency volatility, increasing hedging costs,” the report said.
Energy-intensive sectors such as cement, chemicals, and fertilisers are also likely to face rising input and logistics costs, while gas supply disruptions have led to rationing in some cases. Airlines face a dual shock from higher jet fuel prices and disruptions to international routes, with temporary domestic price caps offering limited and uncertain relief.
In contrast, infrastructure and utility companies are expected to remain relatively resilient, supported by regulated tariff structures and stable cash flows, while natural gas companies are likely to absorb short-term disruptions due to strong balance sheets.
Source: Business Standard
