India's Economic Growth Hides Crisis in Informal Sector as Middle East War Disrupts Supply Chains
Mumbai, 28 April 2026
India’s GDP growth forecast remains steady at 6.7% for 2026-27, but economists warn this masks severe distress in the informal economy, which accounts for nearly half the nation’s output. The ongoing US-Iran conflict has disrupted fuel supplies, forcing urban restaurants and hotels to cut hours or switch to firewood. Limited real-time data on jobs and small businesses makes the crisis difficult to assess, though experts predict ripple effects on employment and demand if disruptions persist beyond the near term.
Economic Forecasts Unchanged Despite Regional Turmoil
A Reuters poll of 54 economists conducted between 20-27 April 2026 reveals India’s economic projections remain largely stable despite mounting pressures from the West Asia conflict [1]. The survey forecasts GDP growth of 6.7% for fiscal year 2026-27, representing a slight decline from the 7.0% expected for the year ending 31 March 2026 [1][3]. Looking ahead, growth is projected to edge up to 6.8% in 2027-28, with forecasts for fiscal 2026-27 ranging between 5.9% and 7.5% [1]. Inflation is expected to average 4.5% this fiscal year, remaining within the Reserve Bank of India’s target range of 2-6% but representing more than double last year’s pace [1][3].
Hidden Crisis in India’s Shadow Economy
The stability in headline GDP figures masks significant distress in India’s informal sector, which has previously accounted for almost half of official GDP [1]. Cities that generate roughly 60% of GDP are experiencing widespread disruption, with many restaurants and hotels reducing operating hours, cutting menus, or switching to firewood as liquefied petroleum gas supplies are disrupted by the Middle East conflict [1]. LPG cylinder shortages in Indian cities have forced establishments to shut operations, fundamentally disrupting informal livelihoods and local supply chains [3]. “The informal segment is the worst hit and its ability to absorb shocks is very low. So we will see a ripple effect on jobs and demand—all of that is going to play out if this problem persists beyond the near term,” warns Upasna Bhardwaj, chief economist at Kotak Mahindra Bank [1][3].
Data Gaps Complicate Assessment of Real Economic Impact
Economists acknowledge that the hit to the informal sector is already notable but difficult to gauge due to limited real-time data on fuel costs, jobs, demand, and small businesses [1]. The lack of comprehensive data on micro and small business impacts hampers proper assessment of the crisis’s true scope [3]. “That’s also the reason why we have not really changed our GDP much at this point in time,” explains Indranil Pan, chief economist at Yes Bank [1][3]. The informal economy’s vulnerabilities are becoming increasingly apparent, with the sector lacking the resilience to weather prolonged disruptions compared to formal economic structures [3].
Fiscal Pressures Mount as Conflict Extends
The government has already cut fuel duties to shield the economy from price pressures, but a prolonged Middle East conflict could seriously hurt public finances [1]. Economists warn that extended disruptions may force a material diversion of funds from capital expenditure to subsidies, potentially damaging the fiscal position and creating medium-term price pressures [1]. “If push comes to shove, there could be a situation where a material diversion of funds from capex to subsidies happens. Price pressures are imminent and will in the medium term affect the fiscal front,” cautions Aditya Vyas, chief economist at STCI Primary Dealer Limited [1][3]. The Reserve Bank of India is expected to keep interest rates on hold until the end of 2027, according to the survey [1][3]. The US-Iran conflict, which began approximately two months ago around 27 February 2026 following US-Israel strikes on Iran, continues to create economic ripple effects across emerging markets including India [3][4].