With the escalation of the Iran conflict raising concerns over India’s energy and fertiliser supplies as well as exports, the government has intensified inter-ministerial consultations to closely monitor developments that could create fresh headwinds for the economy, sources said.
Officials remain hopeful that the conflict will be short-lived, allowing the fiscal consolidation roadmap for Budget 2026–27 to stay on course. However, a prolonged disruption could force policymakers to reassess assumptions.
MEA to lead consultations
The consultations are being led by the Ministry of External Affairs, with detailed discussions centred on energy security and the immediate implications for crude and gas imports. Civil aviation is another sector affected adversely, with hundreds of flights cancelled to global destinations. The finance ministry has shared its assessment on the situation.
“Inter-ministerial consultations will continue to keep a close watch on war-related developments,” an official said, adding that it’s too early to comment on steps that India could take on the evolving geopolitical situation.
A day before the war broke out between Israel-US and Iran, the government was hopeful of better growth next year with upgraded estimates at 7.2-7.4% from the earlier estimate of 6.8-7.2%.
India – A net importer of commodities
India, a net importer of commodities—particularly crude oil and fertilisers—remains vulnerable to external shocks. Oil marketing companies are seen absorbing higher costs as long as crude stays around $80 per barrel (current prices after spike). If prices move beyond that level, companies could incur losses but may choose not to pass them on immediately to consumers, recouping losses later when prices soften, as done previously. However, persistently elevated oil and gas prices would raise the subsidy burden on fertilisers.
Following the escalation, Iran announced the closure of the Strait of Hormuz. In FY25, nearly half of India’s crude imports and over half of its LNG shipments transited through this critical route. A key concern is a sharp rise in LNG prices after Qatar temporarily shut an export facility, triggering a 54% spike in gas prices. India’s LNG supplies from Qatar also move through the strait.
According to Bank of Baroda economist Madan Sabnavis, fiscal revenues may remain largely unaffected unless crude surges well above $100 per barrel and the government cuts excise duties to cushion consumers. The impact on CPI inflation will depend on retail price decisions, as earlier gains from lower crude prices were mostly not passed on.
Analysts estimate that a sustained $10 increase in crude could trim GDP growth by 0.25 percentage points, widen the trade deficit by 0.5 percentage points and raise the fiscal deficit by 0.4 percentage points, assuming the government absorbs the shock.