Moody's Lowers India's 2026-27 Growth Forecast to 6% Amidst Iran Conflict

Global ratings agency Moody's has adjusted its economic growth projection for India downwards for the fiscal year 2026-27, now estimating a growth rate of 6%. This marks a decrease from its previous forecast of 6.8%. The agency cited the ongoing conflict in West Asia, particularly the impact of the war involving Iran, as a key factor influencing this reduction.

In the credit opinion published on March 31, Moody's outlined the immediate effects of prolonged disruptions in liquefied petroleum gas supply, which could lead to household shortages. The report indicated that these disruptions would likely elevate fuel and transport costs, further exacerbating food inflation due to India’s reliance on imported fertilisers.

Moody's forecast predicts that private consumption will remain subdued, with ongoing challenges in industrial activity and a decrease in gross fixed capital formation. These factors are expected to dampen economic momentum while elevated prices and higher input costs persist.

The agency also projected an increase in average inflation in India, predicting it will rise to 4.8% in 2026-27, up significantly from 2.4% in the previous fiscal year. “While inflation remains contained for now, geopolitical risks have tilted the inflation outlook to the upside,” Moody's stated.

As the conflict in West Asia escalates, with Iran creating significant obstacles by blocking the Strait of Hormuz—an essential maritime route for commercial shipping—India faces heightened economic vulnerability. Approximately 60% of India's liquefied petroleum gas is imported, with about 90% of this supply traversing the Strait. Furthermore, around 55% of India's crude oil imports originate from the West Asian region.

In light of these developments, the Indian government has taken steps to mitigate the situation. Since the start of the conflict on February 28, it has managed to reroute around 70% of its crude oil imports away from the Strait of Hormuz. Initially, the government reduced LPG supply to commercial establishments, prioritising domestic needs; however, it has since increased commercial LPG allocations to 70% of pre-conflict levels, up from 50%.

Despite these adjustments, on April 1, there was an increase in the price of commercial LPG by Rs 195.5, resulting in costs reaching Rs 2,078.5 for a 19-kg cylinder in Delhi. These disruptions have led to temporary restaurant closures, with reports indicating a number of migrant workers have returned home due to rising black market prices for LPG cylinders and job losses.

Moody's revised growth forecast aligns with assessments from the Organisation for Economic Cooperation and Development (OECD), which has indicated a moderation in India’s gross domestic product growth from 7.6% in the previous year to approximately 6.1% in 2026-27. Additionally, accounting firm Ernst & Young has estimated that ongoing geopolitical tensions could further erode India’s real GDP growth by about 1 percentage point, potentially raising retail inflation by 1.5% beyond initial forecasts.

The economic outlook provided by Moody's highlights the complexities of managing growth while navigating external geopolitical challenges. As the agency notes, any changes in fiscal policy or external market conditions will heavily influence the trajectory of India's economic recovery moving forward.