India’s Risks and Responses in a Conflict-Driven Global Economy

Geopolitics has once again become a defining force shaping the global economy. Tensions that resurfaced in the mid-2010s have intensified sharply in recent years with multiple overlapping military conflicts, notably the Russia-Ukraine war and the escalating crisis in West Asia, inflicting major negative shocks on an already fragile post-pandemic global economic recovery.

These shocks are likely to have both short- and long-term effects. The most immediate macroeconomic impact is already weighing on economic activity. Earlier projections in the International Monetary Fund’s World Economic Outlook (WEO) had anticipated steady global growth of around 3.3%, alongside moderating inflation. The IMF cut its global growth forecast to 3.1% in April 2026, citing conflict-related disruptions to trade routes, infrastructure and investor confidence. This revision reflects heightened risks from the war in West Asia, which the IMF warned could trigger one of the largest energy crises in modern times.

Inflation, after a brief easing, is rising again. Wars, especially in energy-producing regions, have pushed oil and gas prices higher, with crude prices exceeding $100 per barrel. Food prices are also increasing due to disruptions in fertiliser and supply chains, aggravating global inflationary pressures.

As a result of these inflationary trends, interest rates and monetary policy are tightening. Central banks are keeping rates higher to curb inflation, raising borrowing costs globally and dampening investment and consumption.

The next fallout would be on public debt and fiscal balances, which are expected to deteriorate. Increased military spending and crisis-response measures will likely widen fiscal deficits, particularly affecting developing economies already facing debt distress.

Beyond these immediate effects, the disruptions will also impact trade, investment and growth rates. The COVID crisis and the subsequent war in Ukraine have strained trade and supply chains, encouraging protectionist policies, particularly in the US. The current conflict in the Gulf is compounding this by disrupting key shipping routes, raising insurance costs, reducing trade efficiency and increasing uncertainty. Together, these trends are likely to dampen global trade.

Investments, particularly in global financial flows, are highly sensitive to geopolitical tensions. In such circumstances, global investors are likely to play it safe, delaying their investments. The cumulative impact of lower trade and investment will be detrimental to long-term growth. IMF analysis of historical data shows that countries involved in wars experience output losses of around 7% over five years, with long-lasting effects.

Though India is not a participant in any of these conflicts, these global perturbations will transmit significant economic shocks to the Indian economy. As a large, import-dependent emerging economy, India is particularly exposed to volatility in energy markets, global trade and financial flows. The most immediate impact is on inflation and the current account balance.

India imports over 80% of its crude oil, so any spike in global energy prices directly fuels domestic inflation and widens the current account deficit. Higher fuel costs also feed through to food and transport prices, complicating the Reserve Bank of India’s efforts to maintain price stability. Persistent inflation may force tighter monetary policy, raising interest rates and slowing investment.

In addition, global demand disruptions, particularly in major markets such as the United States and the European Union, can slow India’s export growth across sectors, including IT services, textiles, and manufacturing. At the same time, supply chain disruptions raise input costs for Indian firms, further dampening output.

Financial markets may also be affected through capital flows and exchange rates. Heightened global uncertainty tends to push capital towards safe-haven assets, putting downward pressure on the Indian rupee. A weaker currency makes imports more expensive, reinforcing inflationary pressures and increasing the burden of external debt.

However, much will depend on how these dynamics evolve. In the best-case scenario, India could benefit from supply-chain realignment and geopolitical shifts. As multinational firms diversify away from conflict-affected regions, investment in India may rise, boosting manufacturing and exports. Stable remittance inflows and strategic energy sourcing could further cushion the impact of shocks.

On the other hand, in the worst-case scenario, prolonged wars could push oil prices sharply higher, trigger a global recession, and cause sustained capital outflows. This would lead to slower GDP growth, elevated inflation, a widening fiscal deficit due to higher subsidies, and stress on India’s external balances.

Prudent policymaking can mitigate the effects of these shocks to some extent. This involves a balance between short-term stabilisation and long-term resilience. On the stabilisation front, monetary policy will play a central role. The Reserve Bank of India must remain vigilant to inflationary pressures from elevated energy and food prices. A balanced interest rate stance, combined with liquidity management, can help anchor inflation expectations without unduly constraining growth. Exchange rate management will also be crucial. Limited foreign exchange interventions can help smooth excessive volatility in the rupee while preserving external competitiveness. Fiscal policy must complement monetary efforts. If necessary, and to a limited extent, fuel subsidies may be used to protect vulnerable households, while avoiding broad-based fiscal expansion that could worsen deficits.

Beyond stabilisation, resilience-building policies are essential to reduce structural vulnerabilities. Energy security must be prioritised by diversifying crude oil import sources, expanding strategic petroleum reserves and accelerating investment in renewable energy. Programs aligned with Make in India can strengthen domestic manufacturing, reduce dependence on imports and enhance export capacity. Supply chain resilience can be improved by integrating more deeply with alternative trade networks and leveraging opportunities arising from global realignments. Trade agreements and logistics reforms can position India as a reliable hub within shifting global value chains. Strengthening financial markets and maintaining adequate foreign exchange reserves will also help manage volatility in capital flows.

Finally, structural reforms in factor markets and continued infrastructure development can enhance productivity and long-term growth potential. Investments in digital infrastructure and human capital will further strengthen adaptability in a volatile global environment. In sum, a coordinated policy mix that combines prudent macroeconomic stabilisation with policies that aid diversification will enable India not only to withstand global shocks but also to emerge stronger from them.

(The author is Director at the Institute of Economic Growth. The views expressed in this article are the author's own and do not reflect the editorial position of the publication.)