India could face an additional fiscal burden equivalent to 0.5 per cent of GDP in FY27 as the West Asia conflict keeps global energy prices elevated, forcing higher subsidies, lower tax collections and revenue foregone from fuel duty cuts, according to a report by CareEdge Ratings.
The rating agency’s economists estimate that the Union government may need to absorb nearly Rs 1.9 trillion in additional fiscal pressure in the coming year if crude oil averages USD 90 per barrel, the report titled West Asia Conflict to Weigh on India’s Macro Fundamentals said.
This burden arises from three channels: Rs 1.1 trillion in net revenue foregone from cuts in special additional excise duty on petrol and diesel (adjusted for export duty on diesel and aviation turbine fuel), an estimated Rs 38,000 crore rise in fertiliser subsidy outgo, and around Rs 40,000 crore in lower tax collections due to slower growth.
“The government’s fiscal consolidation path for FY27 is likely to face challenges amid the need for greater fiscal support to shield the domestic economy from global headwinds,” CareEdge said.
Global energy prices have surged sharply since the outbreak of the conflict, with Brent crude oil prices rising 55 per cent and Liquefied Natural Gas (Japan-Korea Marker) prices rising 90 per cent. Multiple energy extraction and production facilities in the region have gone offline, disrupting trade routes and supply chains, the report noted.
CareEdge’s baseline assumption for FY27 is that crude oil will average USD 90 per barrel. Under this scenario, India’s real GDP growth is projected to moderate to 6.7 per cent from an estimated 7.6 per cent in FY26 and a pre-conflict forecast of 7.2 per cent.
If oil prices were to average USD 120 per barrel through the year, growth could fall below 6 per cent, the report said.
India’s vulnerability stems from its high energy import dependence. The country imports around 88 per cent of its oil requirement and 51 per cent of its gas needs. West Asia accounts for about 51 per cent of India’s crude oil imports.
A USD 10 increase in crude oil prices could raise India’s import bill by around USD 20 billion and widen the current account deficit by 30–40 basis points, CareEdge estimated.
Factoring in elevated crude prices and pressure on exports and remittances from the Gulf region, the agency projects India’s current account deficit to widen to 2.1 per cent of GDP in FY27, compared with a pre-conflict estimate of around 1 per cent.
The fiscal stress is expected to be compounded by higher fertiliser subsidies. India sources more than a quarter of its fertiliser imports from West Asian countries, while over 60 per cent of its urea production relies on imported LNG as feedstock. Disruptions to fertiliser trade routes and higher LNG prices could push subsidy requirements well above budgeted levels.
At the same time, slower growth is expected to affect tax revenues. CareEdge’s preliminary analysis suggests tax collections in FY27 could be lower by about Rs 40,000 crore than earlier expected.
The inflation outlook has also worsened. Assuming full pass-through, a USD 10 rise in crude oil prices can lift headline inflation by 55–60 basis points. Under the USD 90 per barrel assumption, CareEdge projects CPI inflation to average between 4.5 and 4.7 per cent in FY27, up from its earlier estimate of 4.3 per cent.
To cushion consumers, the government has already reduced excise duties on petrol and diesel and imposed export duties on diesel and aviation turbine fuel to maintain domestic availability.
Rising fiscal and inflationary pressures have already reflected in bond markets. The 10-year government security yield rose 37 basis points in March to cross 7 per cent, a level last seen in July 2024. CareEdge expects yields to average between 6.8 and 6.9 per cent in FY27 if the conflict eases early, but warns they could rise above 7.4 per cent if oil averages USD 120 per barrel.
The external sector has also come under pressure from capital flows. Foreign portfolio investors pulled out USD 13.6 billion in March alone, the highest monthly outflow in six years, taking FY26 net outflows to USD 16.6 billion.
Amid these pressures, the rupee has depreciated 4.3 per cent against the dollar since the conflict began. CareEdge expects the currency to average between 92 and 93 against the dollar in FY27 under its base case, but weaken towards 98 if oil prices spike further.
“The duration of the conflict and the extent of supply chain disruptions will be critical in determining the scale of impact on India’s macroeconomic fundamentals,” the report said. |
