India defies Iran war oil shock to keep 8% growth on track

India’s stronger-than-expected first quarter growth has bolstered analysts’ confidence that it can sustain its momentum through the rest of the financial year and remain the world’s fastest-growing major economy – even as it remains exposed to high oil prices caused by the US-Iran war.
The Indian economy grew 7.8 per cent in the April-June quarter, comfortably beating the Reserve Bank of India’s forecast of 7 per cent growth, despite the disruption that the Middle East conflict has caused to global energy markets and financial sentiment worldwide.
“While energy will undoubtedly be a headwind for the economy, I suspect that it will sustain the momentum … and surprise analysts on the upside,” said Jamus Lim, an associate professor of economics at ESSEC Business School Asia-Pacific, who predicted annual growth “clocking in closer” to 8 per cent.
Global oil prices had risen far less than some analysts predicted at the start of the war, he said, when projections as high as US$200 per barrel were being bandied about.

Benchmark Brent crude rose 1.3 per cent to US$95.91 a barrel in Asian morning trading on Wednesday, after the US launched a barrage of renewed air strikes on Iran that briefly pushed prices to a five-week high.
India, which imports most of its oil and gas, is seen as especially exposed to such price spikes, though the government has so far shielded households from the worst of the impact through limited, staggered price rises.
Lim said prices were unlikely to climb much further in the coming months as the cooling and travel demand generated by the northern hemisphere’s summer travel season wound down.
“Of course, this doesn’t mean all sectors [in India] will flourish. I am particularly concerned about the rural economy, which is already starting to feel the effects of a strong El Nino year and seeing incomes being hit,” he said.

Farm output and allied sectors grew a modest 3.6 per cent year on year in the first quarter, held back by a dry start to the June-September monsoon and mounting concerns that El Nino weather patterns will affect rainfall later in the season.
The upside surprise was driven largely by tax cuts on goods, services and incomes earlier this year that lifted consumer spending, with personal consumption rising 7.1 per cent, up from 6.8 per cent a year earlier. Private investment nearly doubled its pace, surging to close to 12 per cent from just 5.8 per cent previously.
“Given the challenge with the monsoon and rain deficit, going forward, growth will depend on how manufacturing and services will compensate,” said Dilip Chenoy, chairman of Bharat Web3 Association and former secretary general at the Federation of Indian Chambers of Commerce and Industry.
High factory utilisation rates had encouraged more companies to expand capacity, he said – a trend aided by the government’s production-linked incentive programme to boost domestic manufacturing, which has benefited industries from carmaking to mobile-phone production.
“I am confident that in the next two or three quarters, growth will be around the same range,” Chenoy said, adding that government missions to build up semiconductor manufacturing and the AI industry could further help India withstand both the fallout from the Iran war and Washington’s higher import tariffs.

Borrowed growth?
India has spent months trying to conclude a long-pending trade deal with the United States, its largest export market.
Exports have held up well this financial year, aided by new trade agreements with Britain and the European Union.
“Indian industry has diversified exports and that is reflected in the numbers,” Chenoy said.
That resilience comes despite concerns over inflation from higher international oil prices and policymakers’ struggle to shore up the rupee, which has weakened alongside other Asian currencies amid the US-Iran conflict.
Households are becoming more indebted to maintain their consumption growth
Sunil Sinha, economics professor
Sunil Sinha, an economics professor at the Institute for Development and Communication in Chandigarh, said the rupee’s slide had prompted foreign institutional investors to sell Indian shares along with other emerging market assets, but added that the weaker currency had also made exports cheaper.
“That may be one of the reasons apart from diversification for the export growth,” he said.
Should the Iran war persist into next year, Sinha warned that India would likely experience greater fuel-driven inflation as companies lose the ability to absorb higher input costs rather than passing them on to consumers.

Higher consumer spending, partly fuelled by a rise in personal borrowing, had been a key driver of India’s recent growth, he added.
“Households are becoming more indebted to maintain their consumption growth. But this kind of consumption growth may not sustain,” Sinha said.
ANZ Bank said in a report on Monday that signs of improving urban consumption were emerging in segments such as vehicles, though this had yet to translate into broad-based spending.
“We expect growth to remain robust towards year-end and into 2027, supported by resilient consumers and recovering investment,” said Alexandra Hermann Prasad, lead India economist at Oxford Economics. “But rising inflation and still elevated uncertainty will weigh on spending.”