Indian officials warn that the Iran war could disrupt the country as severely as the Covid pandemic did, with effects that may linger for years and potentially derail its growth trajectory. To reduce the impact on businesses and consumers facing fuel shortages and rising energy costs, the government is turning to strategies used during Covid. This includes a possible ₹2–2.5 trillion credit guarantee scheme for small and medium enterprises, offering collateral-free, fully guaranteed loans to ease liquidity pressures.

India’s heavy dependence on energy imports—especially from West Asia—makes it particularly vulnerable. Officials caution that even if the conflict ends soon, restoring supplies of fuels like LPG could take years due to damaged infrastructure in the region. The Finance Ministry is also preparing for scenarios where crude oil prices average $120 per barrel over the year.

While the government maintains its growth forecast of 6.8–7.2 percent for the fiscal year ending March 2027, economists have begun lowering expectations. Estimates from major institutions suggest growth could fall closer to 6 percent, below the 7–7.5 percent considered necessary to meet long-term economic goals.

The crisis is affecting multiple areas simultaneously, including the rupee, consumer spending, remittances, fiscal capacity, and private investment. Although the shock is currently seen as temporary, prolonged high energy costs and delayed investments could weaken long-term growth. Since late February, the government has taken several measures, such as cutting fuel taxes, supporting exporters to West Asia, and setting up a $6.2 billion stabilization fund. It is also relying on fiscal space built through years of controlled spending.

During Covid, India’s fiscal deficit rose sharply to 9.5 percent of GDP due to large-scale stimulus measures. For the current year, the deficit target is 4.3 percent, though economists expect it could exceed 5 percent due to higher oil prices. Rising energy costs and fiscal pressures have unsettled foreign investors, leading to significant capital outflows and pushing the rupee to record lows. The central bank has responded with measures to stabilize markets.

If the supply shock worsens, the government may eventually raise fuel prices, which could reduce demand, similar to past global crises. Inflation is already showing signs of increase, and there are growing expectations that interest rates could rise. Officials note that the current situation, including tensions in the Gulf and disruptions in key oil routes, echoes the severe supply and demand shocks experienced during the Covid pandemic.