India navigates a new economic uncertainty

For the first time in several quarters, the output of India’s eight core industries slipped into negative territory, contracting by 0.4% in March 2026, against a growth of 3.5% in the same month last year. These sectors—steel, cement, fertilisers, coal, natural gas, electricity, crude oil and refinery products—form the backbone of industrial activity. The decline was not entirely unexpected, coming as it did after the disruption of supplies from West Asia following the attack on Iran.

While the contraction itself is understandable, the larger concern lies in the outlook for growth. India must now navigate an increasingly volatile and unpredictable geopolitical environment. Economists at the Reserve Bank of India flagged the risk of supply disruptions triggering secondary effects, including a demand shock, in their latest bulletin. As noted in the Monetary Policy minutes, the West Asia conflict could shift India’s growth-inflation balance from a “Goldilocks” phase of low inflation and high growth to the opposite extreme.

Global institutions have begun adjusting their expectations. The World Bank has revised India’s growth forecast for FY27 down to 6.6% from 7.2%, citing the likely impact of the conflict on consumption and industrial activity. External demand is expected to remain subdued as uncertainty persists. Even a temporary truce offers limited comfort, given the deep trust deficit between the US and Iran.

Energy-intensive sectors are particularly vulnerable. Airlines may face losses as aviation turbine fuel prices rise sharply, while altered flight routes have increased operational risks, especially around key West Asian hubs. Manufacturing segments dependent on petrochemicals, including automobiles, are also likely to face cost pressures affecting margins and output.

Equally concerning is the outlook for prices. Crude oil is at about $100 per barrel, well above the $70 assumption underlying earlier growth projections. This implies not only supply uncertainties but also sustained cost pressures across sectors. Inflation forecasts have already been revised upwards to above 4.5% for FY 26-27. At the ground level, price increases are visible in the informal economy: tea, snacks and basic food items have seen hikes (a cup of tea retails at ₹12/15 against ₹10 earlier) reflecting signs of cost pass-through.

Although retail fuel prices have not yet been revised, past trends suggest that adjustments will be required. Oil marketing companies are incurring daily losses of about ₹2,500 crore, which cannot be sustained indefinitely. Once fuel prices rise, the cascading impact on transportation and essential goods will be inevitable.

Globally too, inflationary pressures are building. In the United States, consumer prices have risen by 3–4%, which could dampen demand in the world’s largest economy and weigh on global growth. The question, therefore, is how India can respond to this evolving situation: can the economy sustain growth and manage inflation simultaneously?

The current turmoil, though not comparable in scale to the pandemic, is a serious test of India’s economic resilience. Compounding the challenge is the possibility of an El Nino event (predicted by one of the most credible weather agencies, the European Centre for Medium Range Weather Forecasts) which could lead to deficient rainfall across large parts of the country. A setback to agriculture would worsen both growth and inflation dynamics.

There are, however, some positive signals. Domestic demand, particularly in rural and semi-urban areas, has remained robust. Automobile sales reached a record 2.96 crore units in FY26, while tractor sales touched 11.5 lakh in number. GST collections grew by around 9%, indicating steady economic activity as a proxy for nominal GDP growth.

This domestic momentum can help cushion external shocks, but it will not suffice on its own. A coordinated and imaginative policy response is required. The template of the Atmanirbhar Bharat package offers a useful precedent. Measures must be designed to support agriculture, MSMEs, financial institutions, corporates and the services sector.

The government is reportedly working on a substantial credit guarantee scheme worth ₹2.5 lakh crore for affected sectors. Depending on how the slowdown unfolds, targeted cash transfers for vulnerable households may also become necessary. Ensuring adequate availability of fertilisers for upcoming crop cycles will be critical, and indigenous innovations such as nano-fertilisers (covering the NPK spectrum) could play a supportive role.

What is essential now is speed, coordination and clarity. A well-structured package combining fiscal, monetary and regulatory measures— communicated effectively down to the grassroots level and implemented swiftly —can bolster confidence across the economy. At the same time, maintaining price stability in essential commodities (at least rice, wheat, pulses, edible oil and TOP (Tomato, Onion and Potato) through market intervention must remain a priority.

Ultimately, this is a test of economic management and political leadership. Preserving optimism, trust and confidence across all sections of the economy will be crucial as India navigates this challenging phase. The key macro economic fundamentals are indeed these three attributes.