West Asia war: FY27 Budget math in question as conflict continues

Surging crude oil prices and a depreciating rupee as the West Asia conflict continues have put a question mark on the government’s FY27 Budget calculations with expectations that GDP growth would be slower than estimated and there would be increased pressure on prices and the deficit.

Brent crude oil prices surged to over $126 per barrel on April 30 and remained above $110 on May 1 while the rupee touched a record low of 95.35 against the US Dollar on April 30.

Both the Finance Ministry and the Reserve Bank of India have been assessing the impact of the surge in global crude oil prices on India’s GDP growth this fiscal. Downside risks to GDP growth estimates by the RBI at about 6.9% this fiscal have emerged as oil prices continue to remain high and a below average monsoon is expected to pull down agriculture performance.

Officials note that it is still just 60 days into the war and there is ample time for recovery and the second half of the fiscal year could still be better if the ceasefire continues. “The economy was supposed to see slower growth this fiscal and no one was expecting 7% growth this fiscal. What we are now seeing with the rise in crude oil prices is obviously a drag on the economy but the second half may be better,” official sources said.

Additionally, worries of fiscal pressure also mount as the Exchequer absorbs the higher global crude oil prices with no pass through in retail prices of petrol and diesel and as well as an excise duty cut. The Centre has however hiked LPG prices as well as export taxes on fuel.

The Monthly Economic review of the Finance Ministry for April also highlighted that India remains a relative bright spot, with the IMF revising India’s 2026 GDP growth upward to 6.5% but demand conditions and economic activity will be influenced by emerging pressures stemming from rising input prices and supply chain constraints. As the fragile peace holds on with the ceasefire, it expects the situation to improve in the second half of 2026.

At the ICPP Growth Conference organised by Ashoka University on Friday, senior finance ministry officials highlighted the changed picture from the time of the presentation of the Union Budget on February 1.

Noting that the situation has completely changed from India’s so called Goldilocks moment of high growth and low inflation, Expenditure Secretary V Vualnam said that fiscal stress is very much a reality and the coming quarters and days will be challenging.  

DIPAM Secretary Arunish Chawla highlighted that the headline agenda for the next decade would be jobs and growth. “How do you get there and how do you solve all the macro economic problems that we face both on domestic and external front,” he pointed out at the conference, while listing seven key focus areas of reform including value addition in agriculture, R&D, etc.

The Centre has Budgeted fiscal deficit at 4.3% of the GDP this fiscal but with a  hit on revenue from relief measures, higher allocation for fertiliser subsidy — seen to be at least Rs 35,000 crore higher this fiscal, and a higher oil bill, the estimate may have to be reviewed. But a pass through of higher prices to retail customers would however, have a direct impact on inflation as well.

A new report by ICRIER also highlighted that while India has shielded consumers and producers from higher international fuel prices in the wake of the West Asia war, this approach has provided short-term relief and its fiscal cost could be about 0.6% of GDP annually. “It has shifted the burden onto the budget, weakened price signals, and heightened macroeconomic vulnerabilities, particularly through pressures on fiscal and external balances,” said the Policy brief by Sanjeev Gupta and Pratik Tiwary.

“Continuing the current fuel pricing policy would entail significant fiscal costs, especially if elevated oil prices persist due to prolonged supply disruptions even after the conflict subsides, thereby adding to public debt,” it warned.