The union finance ministry today said the impact of the U.S-Israel war with Iran and the overall instability in the Middle East is likely to have a “longer lasting” impact on the Indian economy with elevated risks to India’s balance of payments.

“Implications of this conflict for India are significant and may be longer-lasting in ways that are not immediately understood. As we wrote in the preface to the Economic Survey FY26, this war brings closer the third of the three risk scenarios we mentioned in the preface,” the ministry said in the monthly economic review for February.

“Even if only latent for now, the risks to India’s balance of payments may have become elevated due to this conflict. Stress-testing balance-of-payments under various scenarios has to be undertaken periodically,” the ministry said in the report.

“One thing is certain. The levels of volatility in macroeconomic outcomes and financial markets, and the world's uncertainty, have risen and will likely remain elevated for some time. Regardless of the immediate ‘end game’ for this conflict, it may have made the long-term ‘end game’ for lasting peace in the Gulf and beyond less clear,” it added.

 Do FTAs, new fiscal resources offer a way out?

The report said Gulf conflict has once again underscored the importance of natural resource buffers in the coming years and stressed on the need for fiscal resources. “That will be as true of states as it is true of the Union government. The importance of the certainty, predictability, continuity, and stability of tax policies and tax administration for attracting foreign direct investment has risen a few notches in the current global political scenario,” the report said.

The monthly review said with the government striking free trade agreements and with several underway, new markets for Indian exporters have opened up. “They need to grab it, and it requires their commitment to quality, research and development and innovation. These are eternal reminders, but the conflict now with us has issued a serious, urgent reminder that there is not much time left for Indian businesses to embrace them,” it said.  

“Amid these geopolitical developments, the diffusion of AI and its impact on employment and the competitiveness of India’s service sector offerings must be closely monitored. The importance of preparing India's youth to prosper in the world of AI through meaningful educational reforms has become even more urgent,” it added.