Supply shock ‘apparent’ in Indian economy as West Asia conflict risks rise: Govt report

India’s economy is holding firm on resilient domestic demand, but rising disruptions from the West Asia conflict are clouding the outlook through higher energy costs and renewed inflation risks, a government report said.

In its monthly economic review released on Wednesday, the finance ministry said a “supply shock is apparent in the economy”, even as it noted that India continues to build on a strong
7.6 per cent real GDP growth in the previous fiscal year.

The report flagged that risks are now skewed towards higher inflation and potential fiscal stress, particularly if disruptions in crude oil, fertilisers and key industrial inputs persist.

“The risks are tilted toward persistence rather than quick reversal of price pressures,” the report said, underscoring concerns that external shocks could transmit more deeply into the domestic economy over the coming quarters.

Energy prices and inflation pressures build

A key concern highlighted in the report is the sustained pressure in global energy markets. India’s crude oil basket averaged around $113 per barrel in March and remained close to $115 per barrel through April 24, reflecting elevated import costs.

“Inflation may become cost-push as businesses and producers pass on increased input costs to protect profit margins,” the report noted.

Wholesale inflation
surged to 3.88 per cent in March from 2.13 per cent in February, signalling a sharp transmission of higher input costs across supply chains.

Retail inflation also edged
up to 3.4 per cent in March from 3.2 per cent a month earlier, while food inflation rose to 3.87 per cent, indicating emerging pressures in essential commodities.

The government said that while headline consumer inflation remains relatively contained, upstream price pressures suggest risks of broader persistence if global energy volatility continues.

West Asia conflict drives external shock

The report underlined that the West Asia conflict has altered the macroeconomic environment, with disruptions affecting energy supplies, fertilisers and global trade logistics.

Exports weakened in March, falling 7.4 per cent year-on-year, with 24 of 30 major export categories recording declines. Shipments to key Gulf markets, including the United Arab Emirates and Saudi Arabia, were hit as rising freight and insurance costs disrupted trade routes through the Strait of Hormuz.

Investor sentiment has also taken a hit.

“The conflict has seriously dented investor confidence, disproportionately affecting EMDEs, including India,” the report said.

The rupee’s recent depreciation has added further pressure, with policymakers warning that currency weakness could amplify imported inflation.

Weather risk and spillovers

The report cautioned that the inflation trajectory will depend on both external developments and domestic agricultural output. It warned that if West Asia supply disruptions persist alongside a weak monsoon, price pressures could broaden further.

“If such a gradual recovery is not supported by a good kharif output, it is likely that the price shock at headline inflation could spill over into core inflation through the cost-push channel,” it said.

Financial stability remains strong

Despite external risks, the government said India’s financial system remains stable. Key banking indicators, including capital adequacy, liquidity and asset quality in both scheduled commercial banks and non-banking financial companies, continue to remain robust.

The Reserve Bank of India, it added, is expected to maintain a proactive liquidity management stance to support economic activity.

Labour market and sentiment soften

On the domestic front, labour market indicators showed mild weakening. Unemployment rose to 5.1 per cent in March from 4.9 per cent in February, while urban job sentiment deteriorated further.

Rural sentiment, though still in positive territory, also showed signs of moderation.

“RBI’s latest Consumer Confidence Surveys show moderating sentiment on employment,” the report said, adding that one-year-ahead job expectations remain positive but have softened.