India’s external balance and the government’s finances could take a hit if oil prices remain high for an extended period, as the Iran war drives up the costs of oil imports and the subsidies needed to keep commodity prices affordable, economists said.
India is considered one of the countries most vulnerable to a global oil shock, as it imports approximately 90% of its crude needs and about 50% of its gas needs. More than half of its crude oil comes from the Middle East, where export flows have been disrupted by the US-Israeli war on Iran, and current oil reserves in India are sufficient to cover only 20 to 25 days.
Gas supply shortages have already begun to hit industries and consumers, threatening Iran with prolonged conflict and a $200-per-barrel oil price.
If oil prices average $100 per barrel for a period approaching 12 months, the South Asian country may also see a sharp decline in growth and a rise in inflation.
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The government said in its monthly report last week that the long-term crisis could lead to a widening of the country’s current account deficit, a weakening of the rupee and increased inflation.
Current account deficit
The most immediate impact will be on India’s current account deficit. This concern has pushed the rupee to a record low and forced the central bank to sell dollars from its reserves.
International rating agency ICRA said in a note that an average price of $100 per barrel would increase the current account deficit to between 1.9% and 2.2% of GDP for the fiscal year 2026-2027, from expectations of between 0.7% and 0.8% of GDP.
India’s current account deficit was last at 2% in 2022. Its fiscal year runs from April 1 to March 31.
Financial deficit
The federal government’s annual spending could also rise by 3.6 trillion rupees ($39 billion) in the next fiscal year if oil prices remain at an average of $100 per barrel, according to Mumbai-based Elara Securities.
Total estimated government spending for the next fiscal year is 53.5 trillion rupiah, according to the annual budget presented in February.
A major expenditure will be increased support for the fertilizer sector to ensure farmers receive key inputs at reasonable costs.
At an average price of $100 per barrel, fertilizer subsidy may rise by 200 billion rupees, and the government may also need to compensate oil marketing companies if they are asked to keep retail prices of petrol and diesel low, Elara Securities said.
While retail fuel costs are technically liberalized in India, oil companies tend to delay price adjustments in times of economic stress.
The government is targeting a fiscal deficit of 4.3% of GDP for 2026/27.
If it chooses to maintain this deficit, it may have to cut long-term infrastructure spending used to boost growth and jobs, Elara Securities said.
Impact of growth and inflation
The Indian economy is expected to grow by more than 7% in the next fiscal year, in addition to growth expectations of 7.6% for the current year.
If oil prices remain near $100 per barrel during the next fiscal year, GDP growth may fall to 6.6% and inflation may rise to 4.1%, the State Bank of India’s research department said in a report issued on March 7. If oil prices average $130 per barrel, GDP growth could fall to 6%.
Reserve Bank of India Governor Sanjay Malhotra said in December that the Indian economy was going through a “moderating” phase.
Although growth has been strong, inflation has been low – at 2.75% in January, close to the lower end of the central bank’s comfort range of 2% to 6%.
