A sustained rise in global crude oil prices could put pressure on India’s fiscal deficit and the current account balance, the finance ministry said in a report on Wednesday. While stating that India’s economic conditions remain robust, despite heightened global uncertainties, the ministry perceives “upside risk to inflation, fiscal and current account deficits and downside risk to growth remain in the wake of persistent stand-off in the Gulf region.”
The weaponisation of supply chains globally is a reminder that India needs to travel a long distance to achieve long-term resilience and strategic leverage, the ministry said in the Monthly Economic Review for July. “Swifter policy responses and their implementation are vital to encourage foreign and domestic investment in the Indian economy. Recent years have been a time for hunkering down and battening down the hatches. Coming years will be no exception,” the report said.
The government has budgeted a fiscal deficit of 4.3% of GDP for 2026-27. High oil and fertiliser import bills due to the war in West Asia could lead to the government missing this target.
Budget Buffers
Finance Minister Nirmala Sitharaman on Sunday said that Budget numbers for FY27 do not need to be tweaked as of now, as the government has sufficient buffers to deal with challenges arising from the war in West Asia.
Crude oil prices rose to as much as $100 per barrel earlier this month, as hostilities flared up between Iran and the US after a brief period of peace in June.
Despite global uncertainty, the Indian economy sustained its growth momentum during the April-June quarter, the ministry said. However, some high-frequency indicators, such as e-way bills and the manufacturing Purchasing Managers’ Index saw some softening in momentum, it noted.
But with global challenges showing no sign of letting up, “India has to reinvent itself and reimagine its responses to global imperatives if it has to achieve strategic leverage,” the report said. “As external conditions evolve, the continued interplay of domestic reforms, prudent macroeconomic management and swift policy responses, backed by consistent on-ground implementation will remain important in shaping India’s economic trajectory.”
Comfortable foreign exchange reserves continue to provide a strong buffer against external shocks, while recent policy measures are expected to support foreign capital inflows in the coming months.
Supply Chain Risks
The report highlighted that instances such as flooding in Chile, one of the key copper suppliers, show the concentration risk embedded in India’s industrial metal supply chains.
The projection of El Nino in the coming months presents downside risks, particularly for climate-sensitive rainfed pulses, oilseeds, and livestock in vulnerable central, western, and southern regions, even as irrigated rice remains relatively resilient, the report said.
As severe monsoon deficits can lead to high retail food inflation, weakened rural demand, and fiscal pressure from higher subsidy burdens, there is a need for proactive food stock management, calibrated trade interventions, close monitoring of reservoir allocations, and coordinated inter-ministerial action, the report said.