Iran Conflict May Hit Indian Producers Before Consumers, Says World Bank Economist

The economic impact of the Iran conflict could reach Indian producers before consumers, as higher oil prices feed into wholesale prices and later pass through to spending, World Bank Senior Economist Ran Li told ANI in an exclusive conversation in Delhi on Tuesday.

Li said the main route through which the conflict affects India is oil imports and prices. "The main channel from the Iran conflict will be through the import of oil and then through the price," she said.

The Wholesale Price Index, or WPI, which tracks prices at the wholesale level and so affects producers most directly, "has surged already since June," Li said. "So that will have more immediate impact, if not already, on the industrial sector producers."

She said the pressure could later move to consumers as businesses pass on higher input costs. "As the transmission to pass on to the consumers, yes, that will affect consumer consumption a little bit," Li said. The extent would also depend on other factors supporting domestic demand.

TWO RISKS TO GROWTH

The comments come as the World Bank has raised its growth forecast for India in financial year 2027 to 7.1 per cent. Li named the Iran conflict as one of two major factors that could put pressure on that outlook. The other is the rainfall deficit linked to El Nino.

On the conflict, she said the impact was already becoming visible in August's inflation data and would grow in the second half of the fiscal year.

On agriculture, Li said the rainfall deficit stands at around 12 to 15 per cent against the historical average. The World Bank has already downgraded its agriculture forecast, and she said the impact would show up in farm output and then in rural consumption.

"BETTER THAN EXPECTED"

Even so, Li said India's domestic economy has been more resilient than expected. She credited timely government responses and buffers built over the past decade. Globally, economies have adapted better than expected, and oil prices have not risen as sharply as first feared, she said.

"We also see the high-frequency indicator. They all point to the better-than-expected outcome across a broad segment of the economy," she said.

She pointed to two-wheeler sales as a gauge of rural consumption and four-wheelers as a gauge of urban consumption, both of which have held up relatively well. Investment indicators have also done better than expected, she said, which could partly offset the oil shock's effect on consumption and investment.

WHY WHOLESALE PRICES ARE UNDER PRESSURE

WPI inflation was 9.92 per cent in August, up from 9.78 per cent in July and 9.97 per cent in June, according to government data. It has stayed above 9 per cent for four months. Fuel and power inflation reached 22.93 per cent, and inflation in manufactured products hit a series high of 8.37 per cent.

Official data attribute the climb to the West Asia conflict and the resulting blockade of the Strait of Hormuz, through which most of India's crude imports pass, which pushed up global crude and fertiliser costs. Retail inflation was lower but rising, at 4.82 per cent in August from 4.45 per cent in July. India Ratings' chief economist, Devendra Pant, expects WPI inflation to touch 10.2 per cent in September.

The Reserve Bank of India's Monetary Policy Committee held its policy rate at 5.25 per cent in August and projected retail inflation of 5 per cent for 2026-27, citing a deficient and uneven monsoon under El Nino. Bloomberg reported that the central bank is now widely expected to raise rates on Wednesday, for the first time in nearly four years.

WHAT THE WORLD BANK REPORT SAYS

In its India Development Update on Tuesday, the World Bank raised its FY27 growth forecast to 7.1 per cent from 6.6 per cent, citing strong domestic demand and exports. That is above the RBI's own estimate of 6.7 per cent. A year earlier, the World Bank had put FY27 growth at 6.3 per cent.

The report flagged higher oil prices, El Nino and possible stock-market corrections, which could cause volatility in capital flows, as risks. It also highlighted artificial intelligence as a possible source of productivity gains if policy supports wider adoption.

For the wider region, the Bank projects South Asia to grow 6.9 per cent in 2026, 60 basis points higher than its previous forecast. Franziska Ohnsorge, the Bank's chief economist for South Asia, said government measures to shield consumers, strong remittances and resilient demand had cushioned the shock.

Governments in Asia have leaned heavily on subsidies, however, and the World Bank warned that approach may prove "unsustainable," forecasting that Middle East oil exports will not return to pre-conflict levels until mid-2027.

With inputs from ANI