Mumbai: The world could be staring at a recession within weeks if the ongoing war in West Asia does not ease by mid-April, Neelkanth Mishra, chief economist at Axis Bank, warned on Thursday.
But he said India’s medium-term growth trajectory remains intact, despite some immediate, short-term impact of the war.
“If the Strait of Hormuz doesn’t fully open by mid-April, I think the world is headed for a recession,” he told the Mint India Investment Summit & Awards in Mumbai, noting the narrow window policymakers have to limit the fallout.
The immediate risk stems from power disruptions and supply chain disruptions. India’s vulnerability is rooted in its dependence on imported energy.
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“We import 50% of our energy… Now it’s a constraint on growth,” he said, adding that while it had long been a theoretical risk, it had now become a binding one.
Oil prices are unlikely to offer relief anytime soon. “It is unlikely that oil will fall below $80 or $85 in the next six months,” Mishra said, warning that a sustained rise could trigger significant macroeconomic shocks.
India’s economy is likely to grow 5.9% in 2026, down from the 6.5% estimated earlier this month, Goldman Sachs said in a report on Tuesday, as it cut global growth forecasts to reflect higher energy prices and an expected longer disruption to energy trade through the Strait of Hormuz.
Oil is unlikely to fall below $80 or $85 in the next six months
Brent crude prices have shot up more than 50% since the US and Israel launched a war against Iran on February 28. It is currently trading around $106 per barrel. A spike in oil prices usually has a cascading effect on overall inflation in the economy.
Inflation based on India’s consumer price index (CPI) is likely to come in at 4.6% this year, up from 4.2% estimated as of March 13, Goldman Sachs Global Investment Research said in a report titled “Energy Supply Tighter in Asia” on Tuesday.
“If we have oil at $100 for one year, we will have a trade shock of $80 billion, which is 2.1% of GDP, and then a balance of payments shock of $60 billion,” Mishra said.
Long term optimism
Despite these short-term headwinds, however, Mishra struck an optimistic note about India’s long-term outlook, saying it may fare better than some other countries.
“I’m still not too worried that this will threaten our growth in the medium term,” he said, stressing that domestic demand will be the main driver of growth. India’s relative insulation from global shocks also works in its favor, unlike other export-dependent economies such as China, Korea or Taiwan, which are more exposed to global demand shocks.
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As India expands from $4 trillion to $20 trillion, only a small fraction of incremental growth will come from exports, he pointed out.
Instead, growth is expected to be sustained by structural reforms, productivity improvements and pressure to reduce the cost of capital. This is India’s golden age for entrepreneurship, he said, pointing to ongoing reforms in land use, labor market participation and industrial capacity.
Still, he warned that financial markets are flashing warning signs. “Even more worryingly, the bond markets are now starting to panic,” he said.
Rising yields, such as U.S. 10-year Treasury yields nearing 4.5%, could tighten global financial conditions and increase stress. Still, such market panic may be necessary because rising borrowing costs could force a faster geopolitical solution, he said.
“Nothing is more important than financial market stress as a necessity … to get people to behave.”
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