India’s near-term outlook remains uncertain; West Asia crisis, oil prices pose challenges: Finance Ministry

Raising concerns over India’s growth prospects, the Finance Ministry’s Department of Economic Affairs in its Monthly Economic Review for March has said that the near-term outlook remains uncertain, with external shocks, particularly the West Asia crisis, posing downside risks to growth through elevated input costs and potential supply disruptions. Though it noted that strong macroeconomic fundamentals and robust domestic demand may help cushion the impact.

The geopolitical developments have introduced a complex and multi-layered set of risks for India, given its position as a major energy importer with strong trade, investment, and remittance linkages with the West Asia region.

It said the government's interventions across energy diversification, agricultural preparedness, inflation conditions, external sector strength, and policy measures support the economy's ability to absorb near-term disruptions arising from global developments, while ongoing monitoring and calibrated responses remain important in view of evolving conditions.

While these interventions, along with existing macroeconomic buffers, provide some support, the balance of risks remains tilted to the downside. In this context, continued vigilance and proactive policy measures will be important to mitigate the impact of evolving global uncertainties.

It further said that the recent oil price shock presents an upside risk to the inflation trajectory in the medium term, as higher energy costs are gradually transmitted into domestic prices, particularly in fuel-intensive sectors. It said that while supply disruptions have added to cost pressures, selective price corrections in perishables, amid export-related dislocations, point to localised demand-supply imbalances.

Elevated global crude oil prices also pose risks to the merchandise trade balance, while the outlook for remittances also remains sensitive as the Gulf Cooperation Council economies accounted for about 38% of India's total remittances in FY24 and host nearly half of India's migrants worldwide.

With regard to the current account deficit, the report said it widened to 1.3% of GDP in Q3 of FY26, from 1.1% of GDP in Q3 FY25, mainly driven by a larger merchandise trade deficit, notwithstanding continued strong performance in the services sector. During April-January FY26, it said gross FDI inflows increased; however, this momentum did not translate into higher net FDI, which remained subdued and has been negative for five consecutive months.

Increased geopolitical uncertainty has dampened global risk appetite; as a result, the portfolio flows remained negative in March 2026. Foreign exchange reserves continue to remain comfortable, providing cover for more than 11 months of goods imports