India stares at significant supply shock, rising inflation risk amid West Asia crisis: Finance Ministry

The union finance ministry today said the Indian economy is facing the risk of "significant supply shock" and rising inflation in the wake of the West Asia crisis. The ministry also said El Nino is a concern.

"While the West Asia conflict constitutes a significant supply shock with rising risks to inflation, trade, and financial flows, India’s domestic demand, policy buffers, resilient financial system, and sustained public investment provide some insulation," the ministry said in the monthly economic review for 2026.

"Whether they would prove adequate in the event of prolonged uncertainty about energy and fertiliser supplies is an important question," it added.

"On top of this, the El Niño Southern Oscillation (ENSO) is expected to keep India’s Southwest monsoon below normal. Most rainfall districts are expected to receive below-normal rainfall this season," it said.

That adds to inflation risk. "Therefore, risks are tilted to the upside for inflation, fiscal and external deficits and to the downside for economic growth," it said.

The report said that even though it may appear reasonable to shore up near-term growth priorities, macroeconomic stability is equally important. "Anxious attempts to restore near-term growth may cause significant harm to medium to long term growth prospects by destabilising external balances, the inflation outlook and the currency," it said.

The report also called for several reforms and suggested not to let go of the opportunity for reforms the crisis brings. It urged the government to take up several measures to tide over the crisis.

"First, India should prioritise energy security and resilience. Of course, in doing so, it cannot substitute one import dependency for another. Vulnerability to sudden stoppages should not worsen. Getting public transportation right holistically will enhance both energy security and the liveability of Indian cities. This requires consensus-building with states," it said.

Second, the domestic decriminalisation and deregulation agenda need not be hostage to external developments, the report pointed out.

"In particular, regulatory simplification that lowers the cost of imports and exports will be particularly valuable in these times. Third, this is the ideal time to unleash long-overdue policies (or eliminate them in some cases) that remove distorted crop choices and improve agricultural productivity," it said.

"In India, the forecast of a below-normal, spatially uneven monsoon underscores the urgency of getting agricultural and water policies right. If not now, when?," the report stressed.

"Fourth, boosting, encouraging, and promoting AI-insulated (i.e., resilient to AI-driven labour displacement) durable trade skills among the Indian youth will not only boost domestic manufacturing and services but can also be a source of export earnings," it said.

"India’s employment challenge includes but transcends the impact of AI on Information Technology jobs alone," the report said.

Finally, the report said the need for tax policy certainty and predictability has never been greater.