If the ongoing geopolitical conflict continues for another month, the impact on India would extend beyond energy prices and logistics disruptions and could begin to affect growth, inflation, exports, MSMEs and fiscal stability.
The situation becomes more complex because, in addition to global uncertainties arising from the conflict, there is also a growing possibility of below-average rainfall due to the potential development of El Nino conditions. The combination of an external energy shock and a domestic monsoon risk could compound inflationary pressures and weaken rural demand, thereby creating a dual economic challenge for the Indian economy.
At the macroeconomic level, the most immediate transmission channels of the conflict are higher crude oil and LNG prices, increased freight and insurance costs, and supply chain disruptions.
Higher energy prices will increase transportation and manufacturing costs and eventually feed into inflation. At the same time, a higher oil import bill will widen the current account deficit and will put further pressure on the already weak rupee. The RBI move to force banks to unwind foreign exchange position beyond $100 million to steady the slide is timely but banks will lose money hampering credit growth. If the government reduces fuel taxes to control inflation, fiscal pressures will also increase.
These above factors together can slow economic growth if the situation persists.
If, simultaneously, the country experiences below-average rainfall due to El Niño conditions, the impact could be more pronounced. Lower rainfall can affect agricultural output, increase food prices, and reduce rural incomes. Since rural consumption plays a significant role in supporting domestic demand in sectors such as FMCG, two-wheelers, tractors, consumer goods and affordable housing, a weak monsoon combined with high inflation could dampen consumption demand in the economy.
Therefore, the risk is not only inflation but also a slowdown in consumption, which is an important pillar of India’s growth.
From a sectoral perspective, energy, petroleum, and refining would remain the most impacted sectors due to sustained high crude oil and gas prices. However, a particularly serious concern arises in LPG and gas-dependent sectors. Several industries in India, especially MSME clusters such as ceramics, glass, chemicals, foundries, food processing units, and small manufacturing units depend heavily on LPG and gas for their furnaces and heating processes. In addition, a large number of small eateries, bakeries, food processing units, and hospitality establishments also depend on LPG for daily operations.
If LPG supply becomes constrained or prices rise sharply due to prolonged disruption in supplies, several small and medium factories may be forced to reduce production or temporarily shut down. Similarly, small eateries and food-related businesses may face severe cost pressures affecting their viability. This has implications not only for domestic employment and livelihoods but also for exports, particularly in sectors such as ceramics, chemicals, processed foods, glassware, and certain engineering products where India has a significant presence in global markets. Any production disruption in these sectors would affect export commitments, employment in MSME clusters and overall industrial output, thereby putting additional strain on the economy.
The aviation sector would be significantly affected due to higher aviation turbine fuel prices, longer routes to avoid conflict zone, which would increase operating costs for airlines and potentially lead to higher airfares, thereby affecting tourism, hospitality and business travel.
Fertilisers and agriculture would become particularly sensitive if both global supply disruptions and weak monsoon conditions occur simultaneously. Higher fertiliser input costs combined with lower rainfall could affect agricultural production and farm incomes, which would have second-order effects on rural consumption and inflation.
Export-oriented sectors such as engineering goods, textiles, gems and jewellery, chemicals and pharmaceuticals would face increased freight costs, higher marine insurance premiums, shipment delays and longer working capital cycles. This could particularly affect MSME exporters who operate on thin margins and limited liquidity.
Logistics, shipping and port operations would continue to face disruptions due to rerouting of ships, higher freight rates and insurance costs, which would impact both imports of raw materials and export shipments.
MSMEs would be among the most vulnerable segments because they face immediate working capital stress when input costs rise and payments are delayed. Even otherwise viable MSMEs may face temporary financial stress due to external disruptions of this nature.
Suggested Short-Term Policy Support Measures
In view of the above situation, if the conflict continues for another month and the monsoon outlook also remains uncertain, the government may consider the following short-term measures:
1. Energy Security and LPG Availability
- Continue diversification of crude oil, LNG and LPG sourcing.
- Ensure uninterrupted availability of LPG and natural gas for MSME clusters and critical industries such as ceramics, glass, chemicals, food processing and small manufacturing units.
- Maintain readiness to use strategic reserves in a calibrated manner to manage extreme price volatility.
2. Support for Exporters
- Faster GST refunds and duty drawback disbursement.
- Increase export credit availability and provide temporary interest subvention for export sectors affected by freight and insurance cost escalation.
- Extension of export obligation and realisation timelines where shipments are delayed due to global disruptions.
- Consider partial support for abnormal war-risk insurance premiums for a limited period.
3. Support for MSMEs
- Temporary working capital support through enhanced emergency credit lines.
- Partial credit guarantee support for MSME loans.
- Flexibility in loan restructuring for viable MSMEs affected by external disruptions.
- Faster release of payments due from government departments and public sector undertakings.
- Temporary deferment of select statutory dues for the most affected sectors.
4. Aviation and Tourism
- Temporary and calibrated reduction in taxes on Aviation Turbine Fuel in consultation with state governments to prevent sharp increases in airfares.
5. Fertilisers and Agriculture
- Priority allocation of natural gas to fertiliser plants.
- Timely import of fertiliser raw materials.
- Build buffer stock of key fertilisers in case global supply disruptions coincide with weak monsoon conditions.
6. Logistics and Shipping
- Establish a coordination mechanism between Ministries of Commerce, Shipping, Petroleum and Finance to monitor freight rates, insurance costs and shipping routes.
- Provide logistics facilitation and faster clearances for critical imports and export consignments.
7. Inflation and Food Security Management
- Maintain adequate buffer stocks of food grains and essential commodities.
- Be prepared for timely market intervention to control food inflation if monsoon conditions weaken.
8. Temporary Relief in Corporate and Individual Taxes
Given the extraordinary global situation involving war, supply chain disruptions, energy price volatility and the possibility of a weak monsoon, the Government may consider temporary and targeted relief in corporate tax and individual income tax for one year. This would help companies manage rising input costs, maintain employment and investment, and help households cope with rising prices, thereby sustaining consumption demand in the economy.
Timely intervention will be critical to ensure that a temporary global crisis does not translate into factory shutdowns, export losses, MSME distress and a broader economic slowdown.
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