India's Economy Faces Dual Challenges: Middle East & Trade Deal Impacts

Middle East Conflict May Weigh on India Growth Despite Trade Deal Boost: BMI​

Geopolitical Tensions Could Discourage Investment in India​

New Delhi, March 3: Fitch Group company BMI has cautioned that the ongoing conflict in the Middle East could dampen investor sentiment in India, potentially offsetting the positive impact of trade agreements with the European Union and the United States on the country’s GDP.

In its latest India outlook report, BMI said that while policy uncertainty indicators have remained favourable so far in 2026, uncertainty is expected to rise sharply from March due to escalating geopolitical tensions. The firm believes that heightened risks linked to the Middle East conflict may discourage investment flows into India.

“From March onwards, we expect uncertainty to increase sharply due to the ongoing conflict in the Middle East. We believe this will discourage investment in India, offsetting the EU and US trade deals’ positive effects on GDP,” BMI said.

Despite these concerns, BMI maintained its FY2026/27 GDP growth forecast at 7 percent. However, it flagged risks to the outlook and noted that it is still assessing the evolving geopolitical situation to quantify its precise impact on India’s economic expansion.

Strait of Hormuz Risks Could Impact India GDP​

The report highlighted that tensions escalated after the US and Israel launched military strikes on Iran on February 28. Iran retaliated by firing drones and missiles at Israel and US military installations around the Gulf, and at Dubai, a key global business hub.

BMI warned that Iran has issued threats to ships passing through the Strait of Hormuz. A complete closure of the strait could directly reduce India’s GDP by up to 0.5 percentage points due to higher energy costs.

Following the attacks on Iranian government, military and nuclear facilities, Iran cautioned shipping vessels to stay away from the strait. Insurers subsequently withdrew coverage, effectively halting tanker movements. The Strait of Hormuz is a 33 kilometre narrow passage linking the Persian Gulf to the Arabian Sea and is critical for global oil trade.

India imports nearly 88 percent of its crude oil requirements. Any sustained increase in crude prices would significantly raise the country’s import bill and fuel inflationary pressures, adding strain to economic growth.

India US Trade Deal and EU FTA Offer Potential Upside​

While geopolitical risks remain elevated, BMI also noted that recent trade developments could provide support to India’s economy.

India and the United States agreed early last month on a framework to finalise an interim trade deal under which Washington would reduce tariffs to 18 percent. For the first phase of the bilateral agreement to be signed and implemented, the framework must be converted into a legally binding document.

In February, the US Supreme Court struck down the Trump administration’s reciprocal tariffs, ruling that the president had exceeded his authority by imposing levies under the International Emergency Economic Powers Act of 1977. Following the court’s decision, the US imposed a 10 percent tariff on all countries for 150 days, effective February 24. Although former President Donald Trump announced plans to raise it to 15 percent, no official order has been issued.

Separately, India and the European Union agreed in January on a Free Trade Agreement that will come into effect within a year after legal ratification.

BMI stated that the India US trade deal and the US Supreme Court ruling could boost India’s economy more than currently expected, partially cushioning the impact of rising global uncertainty.

India Growth Outlook Hinges on Global Developments​

BMI’s assessment underscores a delicate balance for India’s growth trajectory in FY2026/27. While trade agreements with major economies such as the US and the EU provide structural support, rising geopolitical tensions in the Middle East and potential disruptions in global energy supply chains pose tangible downside risks.

The extent to which the conflict escalates, particularly around the Strait of Hormuz, will be critical in determining its eventual impact on India’s GDP and broader macroeconomic stability.