Citing the axiom that crises should not be wasted, the Economic Division in the Finance Ministry on Wednesday made a strong pitch for India to push through long-pending reforms in response to the West Asia crisis and flagged the risks of an ‘excessive focus on short-term growth preservation’.
India should safeguard medium term fiscal and external stability, officials in the division led by Chief Economic Adviser V Anantha Nageswaran, stressed in the monthly economic review for April. “It will be a reasonable temptation for many countries to shore up near-term growth and preserve employment. However, macroeconomic stability is equally important, as 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,” they cautioned.
“…The risks of excessive focus on short-term growth preservation should not override the broader macroeconomic interests of attracting investment and boosting domestic capital formation. Indeed, there is no contradiction between the two in the end,” the division argued in the preface to the economic review.
Mooting a five-pronged reforms strategy instead, including the importance of certainty and stability in tax policy, the division’s officials prioritised energy security and resilience “without substituting one import dependency for another or worsening vulnerability to sudden stoppages”. A comprehensive push on public transportation could simultaneously strengthen energy security and improve urban liveability, and would require “consensus-building with states”, as the current crisis warrants coordinated action across stakeholders, officials posited.
“There is more haze than visibility on the duration for which energy supplies will remain disrupted. The official Short-Term Energy Outlook (STEO) of the U.S. Energy Information Administration released on the 7th April provides a helpful timetable. It does not look pretty, but most seem to be unwilling to engage with reality,” officials averred.
While some countries are yet to begin passing on higher energy prices to end-users, the review’s authors stated “it is inevitable” that if demand doesn’t moderate during a period of supply disruption, countries will have to pay a much higher price for energy supplies. “India’s crude oil basket averaged USD 113 per barrel in March, and it is just under USD 115 per barrel for April until the 24th,” the review noted.
“In the presence of pervasive uncertainty and distrust, it does not make sense to assume the best, as stock market investors seem to be doing,” the economic division officials remarked.
This is the ideal time, they emphasised, “to unleash long-overdue policies (or eliminate them in some cases) that remove distorted crop choices and improve agricultural productivity”. “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?”
“If the ongoing conflict in West Asia results in meaningful action with durable effects on these fronts and more in this financial year, India will emerge with a much stronger foundation and platform for sustained high growth in the years to come,” the review projected.
While the West Asia conflict constitutes a significant supply shock, India’s domestic demand, policy buffers, resilient financial system, and sustained public investment provide some insulation.
“Whether they would prove adequate in the event of prolonged uncertainty about energy and fertiliser supplies is an important question… Risks are tilted to the upside for inflation, fiscal and external deficits and to the downside for economic growth. However, while striving to sustain economic growth, policy is expected to safeguard medium-term fiscal and external stability,” it added.
While supply-side stresses are becoming increasingly evident, the report said demand conditions in March, as evident from retail vehicle sales as well as tractor sales, still appear reasonably robust. “Looking ahead, demand conditions and economic activity will be influenced by emerging pressures stemming from rising input prices and supply chain constraints. However, as the fragile peace holds on with the ceasefire, we expect the situation to improve in H2 of 2026,” it added.
The review cautioned that as the evolving West Asia conflict begins to exert pressure on economic activity, it will have direct implications for both revenue realisation and expenditure commitments in 2026-27. It also called for an assessment of fiscal position of states, given their critical role in aggregate public spending.
“Notwithstanding these emerging headwinds, the Centre enters the fiscal year from a position of relative prudence. The fiscal consolidation path adhered to in recent years, coupled with the Budget’s conservative assumption of a gross tax revenue buoyancy of 0.8, which is below the historical average, and the creation of an Economic Stabilisation Fund in the public account, provides room for fiscal interventions,” it added.
Citing external sector trends, the report noted that India’s merchandise trade deficit widened to $333.2 billion in FY26 from $283.5 billion in FY25, while the overall trade deficit rose to $119.3 billion from $94.7 billion during the same period. “The pattern is likely to persist in FY27, with even wider deficits, alongside a higher current account deficit,” it said.
While describing the recent pickup in gross foreign direct investment (FDI) inflows as encouraging, the review warned that the global environment was becoming more competitive. “Countries are increasingly weaponising supply chains and investment flows, making relocation decisions more complex for businesses,” it said.
“India’s task is cut out,” the economic division’s officials added, calling for a coordinated push across agencies to attract capital flows through stable tax policies, improved logistics, better urban liveability, stronger research and innovation ecosystems, and a skilled and healthy workforce.
Among other reforms, the review said the domestic decriminalisation and deregulation agenda should not be held back due to global uncertainties, adding that regulatory simplification — particularly steps that lower the cost of imports and exports — would be “especially valuable in these times”.
The review also highlighted the need to build a workforce resilient to technological disruption. “Boosting AI-insulated, durable trade skills among the youth will support domestic manufacturing and services while creating export opportunities,” it said, adding that India’s employment challenge “extends beyond the impact of AI on IT jobs alone”.
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