 "India is widely seen as among the most vulnerable economies to a global oil shock.")
India’s external balance and government finances could take a hit if oil prices remain elevated for an extended period, economists have warned, as the Iran war drives up crude import costs and increases the subsidies needed to keep essential commodities affordable.
India is widely seen as among the most vulnerable economies to a global oil shock. The country imports nearly 90 per cent of its crude requirements and about 50 per cent of its gas needs. More than half of its crude imports come from the Middle East, where export flows have been disrupted by the U.S.-Israeli war on Iran. Meanwhile, India’s current oil stocks are estimated to cover only about 20 to 25 days of consumption.
Gas supply shortages have already begun affecting industries and consumers, while Iran has threatened a prolonged conflict and warned oil prices could surge to as high as $200 per barrel (about Rs 18,492).
If crude prices average around $100 per barrel (about Rs 9,246) for close to a year, economists say India could see a sharp slowdown in growth alongside rising inflation.
A prolonged crisis could widen the country’s current account deficit, weaken the rupee and fuel inflation, the government noted in its monthly economic report last week.
Oil shock could widen India’s current account deficit
The most immediate impact would likely be on India’s current account deficit. Concerns over higher oil import costs have already pushed the rupee to record lows and forced the central bank to intervene by selling dollars from its reserves.
If crude averages around $100 per barrel (about Rs 9,246), the current account deficit could widen to between 1.9 per cent and 2.2 per cent of GDP in the 2026–27 financial year, compared with a projected 0.7 per cent to 0.8 per cent, according to a note by rating agency ICRA.
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View AllIndia’s current account deficit last stood at about 2 per cent in 2022. The country’s financial year runs from April 1 to March 31.
Higher oil prices could strain government finances
Higher oil prices could also strain government finances. Federal expenditure could rise by as much as 3.6 trillion rupees ($39 billion, or about Rs 3.61 lakh crore) in the next financial year if crude averages $100 per barrel (about Rs 9,246), according to Mumbai-based Elara Securities.
The government has estimated total spending of 53.5 trillion rupees for the next financial year in the Union Budget presented in February.
A major portion of the additional spending would likely go towards fertiliser subsidies to ensure farmers continue to receive key inputs at affordable prices.
At $100 per barrel (about Rs 9,246), fertiliser subsidies alone could increase by around 200 billion rupees, Elara Securities said. The government may also have to compensate oil marketing companies if they are asked to keep petrol and diesel prices low.
Although fuel prices in India are technically deregulated, oil companies often delay price adjustments during periods of economic strain.
The government has targeted a fiscal deficit of 4.3 per cent of GDP for the 2026–27 financial year. If it chooses to maintain that target despite higher oil costs, it may have to scale back long-term infrastructure spending that has been central to its growth and employment strategy, Elara Securities said.
Oil surge threatens growth and inflation outlook
India’s economy is expected to grow by more than 7 per cent in the next financial year, on top of an estimated growth rate of 7.6 per cent for the current year.
However, if oil prices remain close to $100 per barrel (about Rs 9,246) through the next financial year, GDP growth could slow to around 6.6 per cent while inflation could rise to about 4.1 per cent, according to a report by the research department at the State Bank of India released on March 7.
If crude prices average as high as $130 per barrel (about Rs 12,020), GDP growth could drop further to around 6 per cent, the report said.
India’s economy has been in what Reserve Bank of India Governor Sanjay Malhotra described in December as a “Goldilocks” phase — a period characterised by strong growth and relatively low inflation.
Inflation stood at 2.75 per cent in January, close to the lower end of the central bank’s comfort band of 2 per cent to 6 per cent.
FAQs
1) Why is India vulnerable to a global oil price shock?
India is highly dependent on energy imports, bringing in nearly 90 per cent of its crude oil and about 50 per cent of its natural gas from abroad.
2) How could higher oil prices affect India’s economy?
Sustained high oil prices could widen India’s current account deficit, weaken the rupee and push up inflation. Economists say if crude averages around $100 (about Rs 9,246) per barrel, economic growth could slow while consumer prices rise due to higher energy and transportation costs.
3) Could high oil prices affect India’s government finances?
Yes. Higher crude prices could force the government to increase subsidies on fertilisers and fuels to protect consumers and farmers. Analysts estimate government spending could rise significantly if oil prices remain elevated, potentially putting pressure on the fiscal deficit.
With inputs from agencies