Fertilisers, LPG, OMCs, Excise: 4 sectors where West Asia crisis is straining India’s budget, says ICRA

Rating agency ICRA says these sectors face interconnected pressures, and buffers may not be sufficient if the conflict continues.

Indian crude basket sees $50 jump

The Indian basket of crude oil averaged $125.7 per barrel in March 2026, up from $69 per barrel in February, while natural gas prices on the Japan Korea Marker surpassed $20 per million British thermal units on March 18. 

The government had budgeted for a fiscal deficit of 4.5% of Gross Domestic Product for FY2027, based on the 2022-23 GDP series.

1. ICRA on fertilisers: Among most exposed sectors

India’s fertiliser industry sits at one of the most exposed ends of this crisis. The country depends heavily on imports for Di-Ammonium Phosphate, Muriate of Potassium, and certain grades of urea and NPK compounds. As per data for the first half of FY2026, 56% of Di-Ammonium Phosphate and 100% of Muriate of Potassium requirements are met through imports, while many domestic urea manufacturers are exposed to global prices through imported Liquefied Natural Gas used as feedstock.

Escalation of the conflict leads to supply and logistical disruptions, raising input costs for fertiliser production, with Di-Ammonium Phosphate remaining highly exposed, ICRA indicates.

ICRA estimates the total fertiliser subsidy requirement at Rs 2.1 lakh crore for FY2027, assuming a pooled gas price averaging $15 per million British thermal units. This is nearly Rs 40,000 crore above the Budget Estimate of Rs 1.7 lakh crore set for FY2027.

“ICRA estimates the aggregate fertiliser subsidy requirement at Rs 2.1 lakh crore for FY2027, assuming pooled gas price at an average of $15 per million British thermal units, similar to the estimated outgo for FY2026 after including additional outgo announced under the 2nd Supplementary Demand for Grants. This is nearly Rs 40,000 crore higher than the budgeted level set for FY2027 and would thereby necessitate additional allocations to be made through the fiscal,” ICRA notes.

2. ICRA on oil marketing companies and LPG: Under-recoveries are rising

The pressure on Oil Marketing Companies is coming from two directions. On the LPG side, cumulative under-recoveries on domestic LPG had already reached Rs 50,600 crore as of December 31, 2025. The West Asia conflict and higher international LPG prices add to this pressure.

Oil Marketing Companies have hiked prices of non-subsidised domestic LPG cylinders by Rs 60 per 14.2 kg cylinder to Rs 923 across metro cities from March 7, 2026. Commercial cylinder prices rose by Rs 114.5 per 19 kg cylinder. Despite this, under-recoveries are expected to rise as international prices remain elevated.

The government had announced a one-time grant of Rs 30,000 crore to public sector Oil Marketing Companies for LPG under-recoveries in August 2025, to be paid in 12 monthly instalments. This is already factored into FY2026 Revised Estimate and FY2027 Budget Estimate. ICRA expects additional support beyond this.

Assuming an average crude oil price of $85 per barrel, ICRA estimates LPG under-recoveries at approximately Rs 20,000 crore for FY2027. The fuel subsidy Budget Estimate for FY2027 stands at Rs 12,100 crore, implying the actual outgo could exceed the budgeted level.

“Despite the upward revision in prices and support from the Government of India, the cumulative under-recoveries of Oil Marketing Companies on domestic LPG are set to rise further from Rs 50,600 crore as of December 31, 2025, owing to high international prices of LPG and lower realisations on sales, amid severe supply shortages due to the West Asia conflict and the consequent increase in international LPG prices. This may lead to additional support from the Government of India in the form of one-time grants,” ICRA notes.

3. ICRA on upstream oil companies: Gains partly offset downstream losses

Upstream oil companies benefit from elevated crude prices, while downstream margins remain under pressure, ICRA indicates.

Corporate tax collections from the petroleum sector stood at Rs 43,240 crore in FY2025 and Rs 23,550 crore in the first half of FY2026, accounting for 5% of total corporate tax collections in that period, as per ICRA.

While upstream profitability improves, downstream losses reduce tax contributions. ICRA indicates this provides only a partial offset, and the overall impact on government revenues could remain negative.

Higher crude prices are likely to affect profitability across sectors, posing a downside risk to the corporate tax target of Rs 12.3 lakh crore for FY2027, which assumes 11% growth.

“If the current elevated level of crude oil prices sustains for a long period, it could potentially reduce the marketing margins of downstream companies, thereby dampening the corporate tax collections of the Government of India to some extent. However, this would be partly offset by the increase in profitability of the upstream companies,” ICRA notes.

4. ICRA on excise duty revenue: A Rs 45,000 to Rs 50,000 crore risk

Petrol and diesel retail prices have remained unchanged since mid-March 2024. If crude prices stay high, Oil Marketing Company margins come under pressure, ICRA indicates. At $85 per barrel, Oil Marketing Companies would earn zero marketing margin on petrol and incur losses on diesel. At $100–105 per barrel, losses widen further.

The government can allow price increases or reduce excise duties. ICRA indicates that excise adjustments may be considered to keep retail prices stable.

For every Rs 1 per litre cut in excise duty, the government loses Rs 15,000 to Rs 16,000 crore annually. A Rs 3 per litre cut implies a revenue loss of Rs 45,000 to Rs 50,000 crore in FY2027, as per report.

“The Government of India may reduce the excise duty rates on petrol and diesel to keep the retail selling prices stable at the existing levels, giving the Oil Marketing Companies more headroom to collect additional revenues to compensate for the refining losses,” ICRA notes.

The buffer story: Why the deficit may not widen sharply

ICRA points to buffers that could absorb part of the shock. The Economic Stabilisation Fund, sized at Rs 1 lakh crore, is a key tool. Of the Rs 2.01 lakh crore announced under the 2nd Supplementary Demand for Grants, Rs 57,400 crore was allocated to this fund.

ICRA expects small savings collections to exceed FY2026 Revised Estimate by at least Rs 50,000 crore, providing carry-forward balances. Government securities switches of Rs 1.1 lakh crore have reduced FY2027 gross borrowings to Rs 16.1 lakh crore from Rs 17.2 lakh crore. Expenditure savings averaging Rs 1.8 lakh crore annually provide additional room.

“ICRA believes that the amount allocated under the Economic Stabilisation Fund can be utilised to absorb a portion of the revenue and expenditure shock to the Government of India arising from a shortfall in its dividend receipts and corporate tax collections, a possible cut in excise duty, and higher allocation towards the fertiliser and fuel subsidy. This would prevent a material overshooting in the Government of India’s fiscal deficit target of 4.5% of Gross Domestic Product, albeit with sizeable upside risks if the ongoing conflict persists for a prolonged period,” ICRA notes.