India may need a major recalibration of its economic strategy as the continuing West Asia conflict, rising crude oil prices, supply disruptions and global slowdown threaten to cast a long shadow over growth, inflation and external stability, according to the latest edition of EY Economy Watch.
The May 2026 edition of the report paints a cautious picture of the Indian economy amid mounting geopolitical uncertainty and structural global changes, while also underlining the need for India to build stronger economic buffers and reduce long-term vulnerabilities, EY India Chief Policy Advisor DK Srivastava said.
West Asia crisis emerging as major economic risk
The report warned that the economic impact of the continuing conflict in West Asia could extend far beyond higher crude oil prices. According to DK Srivastava, India faces risks from elevated energy prices, uncertain crude and gas supplies, commodity price volatility to fertilizer shortages and weaker exports slowing remittance inflows from Gulf countries.
“The economic shadow of the continuing West Asia conflict is likely to be accompanied by a number of other developments casting some clouds over the Indian economy,” Srivastava said.
India, which remains heavily dependent on imports for crude oil, LPG and several critical commodities, could face increasing pressure on inflation, trade balance and fiscal stability if the geopolitical tensions persist.
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El Nino, AI disruption and slowing exports add to concerns
Apart from global tensions, the EY report flags multiple domestic and global risks that could hurt India’s growth trajectory in both the short and long term.
The report also warned that the expected El Nino weather pattern could negatively impact agricultural and food output, raising concerns over food inflation and rural distress.
It also showcased how the rapid rise of artificial intelligence could disrupt India’s IT-driven skilled workforce over time, potentially affecting employment opportunities in the services sector that has traditionally powered export growth.
Meanwhile, subdued global demand and slowing world growth are expected to weaken India’s export performance. The report also cautioned that inward remittances from Gulf countries could decline if oil-dependent Middle Eastern economies come under prolonged stress.
Fiscal deficit and inflation pressures may worsen
EY India’s analysis suggests that both fiscal and monetary policy options could become increasingly constrained in FY27.
The report warns that the Union government’s fiscal deficit may exceed budget estimates because of higher subsidy burdens linked to food, fertilizers and petroleum products.
It noted that the government may not fully pass on higher crude oil prices to consumers, increasing fiscal pressure.
On inflation, the report said that the wholesale price inflation (WPI) surged sharply to 8.3% in April 2026 from 3.9% in March, largely due to rising energy-related input costs and manufacturing pass-through effects. Consumer price inflation (CPI), however, remained relatively contained at 3.5% in April, helped by limited transmission of global crude prices into retail fuel rates.
Still, the report warned that if inflationary pressures continue, the Reserve Bank of India (RBI) may eventually be forced to raise interest rates despite concerns over growth.
Current account deficit may rise close to danger zone
The report projects worsening pressure on India’s current account deficit (CAD) as crude prices remain elevated.
India’s CAD had improved significantly from 2% of GDP in FY23 to 0.6% in FY25. However, the report estimates that it could move closer to 2% of GDP in FY27 due to rising energy import bills. EY noted that the sustainable level of India’s current account deficit is estimated at around 1.3% of GDP, meaning prolonged high oil prices could create external vulnerability.
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High-frequency indicators show mixed economic signals
The report said recent economic indicators for March and April 2026 offer mixed signals about the health of the economy.
Manufacturing activity slowed amid rising input costs, with the manufacturing PMI slipping to 54.7 in April, its second-lowest level since June 2022. However, the services sector remained resilient, with services PMI rising to a five-month high of 58.8, supported by domestic demand.
Other indicators showed GST collections rising to Rs 2.4 lakh crore in April, motor vehicle retail sales growing 12.9%, merchandise exports rising 13.8%, merchandise imports increasing 10% and trade deficit widening to $28.4 billion.
Industrial growth also softened, with IIP growth falling to a five-month low of 4.1% in March. Meanwhile, foreign portfolio investor (FPI) outflows surged to $13.3 billion in March 2026, the highest since the Covid-era market turmoil of March 2020.
EY suggests strategic economic overhaul
The report calls for a significant rethink of India’s economic preparedness in the face of rising global uncertainty. It backs Prime Minister Narendra Modi’s recently proposed seven-step strategy focused on reducing gold imports, limiting unnecessary foreign travel and reducing domestic fuel consumption.
The EY report concludes that India’s long-term growth ambitions can still remain intact, but only if policymakers prepare for increasingly frequent global disruptions. “In view of the mounting pressures emanating from the West Asia crisis and the changing world trade and economic order in general, India may recast its growth strategy to ensure that no long-term damage is done,” the report said.
TOPICSeconomy newsWest AsiaThis article was first uploaded on May twenty-eight, twenty twenty-six, at six minutes past six in the evening.