India Reports Stable Fiscal Position Despite Oil Price Increases

India Sees No Immediate Risks to Fiscal Deficit Target Amid Middle East Crisis

India is not anticipating any immediate risks to its fiscal deficit target for the 2026/27 financial year, which began on April 1, despite the ongoing crisis in the Middle East. According to two government sources, the government will continue to prioritize capital spending, with officials considering austerity measures to manage the fallout from the crisis.

The government is focusing on critical sectors such as roads, railways, and airports, which are seen as essential for sustaining growth and creating jobs. In February, India announced its intention to target a fiscal deficit of 4.3% of GDP for the current financial year, a decrease from 4.4% last year.

However, the Iran war has led to a significant increase in oil prices, placing a burden on the finances of India's federal government. To mitigate the impact on consumers, the government has already cut excise duties. Economists predict that the government may struggle to meet its fiscal goals, with Standard Chartered forecasting a slippage of 0.7-0.9 percentage points of GDP.

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Despite the challenges, the government officials cited above stated that the budget projections would not be revised immediately. One of the officials noted that the current situation would need to persist for at least two to three months before any revisions are considered.

Higher Spending Burden

The government is likely to face increased spending on fertilizers and petroleum subsidies, which are budgeted at 1.83 trillion rupees ($19.69 billion) for the 2026/27 financial year. This is due to rising global commodity prices. Additionally, the government will lose revenue due to the cut in excise duties on fuel products.

A sharp increase in pump prices is unlikely amid state assembly elections, with four large Indian states set to go to the polls between April 9 and April 29. Some of the additional spending will be offset by better targeting of subsidies and savings by ministries on schemes.

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Capital Spending Remains Priority

The federal government's capital spending is budgeted to rise to 12.22 trillion rupees ($131.45 billion), or about 4.4% of GDP, in the current fiscal year. This represents an increase from revised spending of 10.96 trillion rupees ($117.90 billion) in 2025/26, according to the annual budget.