No time for 'complacency', India’s shock absorbing capacity should be strengthened: FinMin report

"The future has become that much more uncertain, with every indication that it will remain so for quite some time to come," the MER said.

• Finance Ministry warns against complacency amid global risks
• Middle East conflict may impact India's macroeconomic stability
• India urged to seize new export markets and embrace innovation

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This is no time for "complacency or basking in the solidity of our post-Covid macroeconomic performance hitherto", the Finance Ministry said in its February 2026 Monthly Economic Review, adding that such success now "belongs to history".

"The future has become that much more uncertain, with every indication that it will remain so for quite some time to come," the MER said.

If and when growth is buffeted by external developments, long-standing issues such as urbanisation, air and water pollution, unbalanced economic development of states and the unsustainable fiscal health of some of them may emerge as more binding growth constraints than before, it added.

At the same time, the current global scenario also carries with it immense opportunities, the MER said. "India’s shock absorbing capacities, amply demonstrated in recent years, if strengthened by proactive and entrepreneurial governance characterised by speedy decision-making, among other things, may become more priceless for investors, eliminating much of the potential stress to balance of payments."

"Even better, it may result in bigger capital inflows, accelerating investment and growth in the process, in an otherwise challenging environment," said the MER.

On the ongoing conflict in Middle East, the MER said that speculation as to what would constitute the endgame for this conflict is rife. "One thing is certain. The levels of volatility in macroeconomic outcomes and financial markets, and the world's uncertainty, have risen and will likely remain elevated for some time."

For oil traders, the central question is not whether hostilities pause but whether the risk to supply routes has fundamentally diminished. "If the Strait of Hormuz remains vulnerable to disruption, the geopolitical risk premium in oil prices will inevitably return. If the confrontation ends with a credible shift in the regional balance of power, the international system will gradually absorb the shock, and markets will stabilise. But if the declaration of victory precedes the resolution of the underlying strategic contest, the apparent calm may prove fleeting," said the MER.

Also read: Despite external challenges, strong macro fundamentals & reform momentum bodes well for economy: FinMin

'Conflict may have long-lasting impact'

On the implication of this conflict in India, the MER says that they may be longer-lasting in ways that are not immediately understood. As we wrote in the preface to the Economic Survey FY26, this war brings closer the third of the three risk scenarios we mentioned in the preface.

The third scenario mentioned in the Economic Survey for 2026-26 said that the recent phase of highly leveraged AI-infrastructure investment has exposed business models that are dependent on optimistic execution timelines, narrow customer concentration, and long duration capital commitments. "A correction in this segment would not end technological adoption, but it could tighten financial conditions, trigger risk aversion and spill over into broader capital markets."

"If such developments were to coincide with geopolitical escalation or trade disruption, the resulting interaction could produce a sharper contraction in liquidity, a sudden weakening of capital flows, and a shift toward defensive economic responses across regions. While this remains a lower-probability scenario, its consequences would be significantly asymmetric. The macroeconomic consequences could be worse than those of the 2008 global financial crisis," the Economic Survey had said.

"We had also noted that the coming two decades might more closely resemble the inter-war period of the last century than not. If it is the baseline scenario, then maintaining steady, if not high, growth and macro and financial stability become paramount considerations for policy, as stability itself will be at a premium globally," said the MER.

'Fiscal reprioritisation' may be necessary

The last few days since the Gulf conflict erupted have once again underscored the importance of natural resource buffers in the coming years. "Fiscal resources have to be found, and hence reprioritisation may be necessary in the coming years. That will be as true of states as it is true of the Union government," said the MER.

"The importance of the certainty, predictability, continuity, and stability of tax policies and tax administration for attracting foreign direct investment has risen a few notches in the current global political scenario. Even if only latent for now, the risks to India’s balance of payments may have become elevated due to this conflict. Stress-testing balance-of-payments under various scenarios has to be undertaken periodically," it added.

'Grab' new external markets

With the government striking free trade agreements and with several underway, it has opened up markets for Indian exporters, said the MER, adding that "they need to grab it, and it requires their commitment to quality, research and development and innovation."

"These are eternal reminders, but the conflict now with us has issued a serious, urgent reminder that there is not much time left for Indian businesses to embrace them," said the MER.

Amid these geopolitical developments, the diffusion of AI and its impact on employment and the competitiveness of India’s service sector offerings must be closely monitored, it added. "The importance of preparing India's youth to prosper in the world of AI through meaningful educational reforms has become even more urgent."