How do geopolitical risks impact GDP?

Based on the analysis provided in your sources, geopolitical risks impact GDP through several direct macroeconomic channels:

1. Input Cost Inflation & Profit Margin Compression

Sticky Energy Prices: Geopolitical stalemates, such as the conflict in West Asia, keep crude oil prices elevated (e.g. averaging around $95 per barrel).

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Margin Squeeze: Rising costs for raw materials, fuel, and intermediate goods increase operating expenses for manufacturers faster than output prices can rise, compressing corporate profit margins and slowing Gross Value Added (GVA) growth in the industrial sector.

2. Trade & Logistics Disruptions

Maritime Corridor Friction: Geopolitical tensions near critical sea lanes (such as the Red Sea and the Strait of Hormuz) disrupt maritime trade routes.

Elevated Freight & Insurance Costs: Insurance providers often raise premiums or pull coverage during regional conflicts, sharply increasing shipping costs for businesses.

Export Contraction: Higher transit costs and softening global demand directly drag down merchandise export volumes—for instance, causing a 2.8% YoY drop in India's merchandise exports in Q4 2025–26 across sectors like textiles, pharmaceuticals, and gems & jewellery.

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3. Financial Volatility & Capital Costs

Bond Yield Surges: Commodity price shocks triggered by regional crises increase market uncertainty and inflation fears, driving up government bond yields (such as the 10-year G-Sec yield surging from 6.59% to 7.04%).

Banking Profitability: Rapid yield increases lead to mark-to-market treasury losses for commercial banks, straining financial sector profitability and credit conditions.

4. Moderation of Macroeconomic Forecasts

Dampened Growth Outlook: The combination of higher import bills, export deceleration, and tighter financial market conditions leads rating agencies to trim GDP growth projections—such as ICRA lowering its FY 2026–27 GDP growth forecast by 30 basis points to 6.2%.