West Asia Conflict to Weigh Heavily on India's FY27 Fiscal Projections: ICRA Warning

Global Crude Oil and Natural Gas Price Surge Complicates India's Fiscal Position in FY2027

Key Findings:

• Global crude oil prices have more than doubled from pre-crisis levels, raising input and logistics costs and disrupting supplies, including key fertiliser inputs.
• Elevated energy prices could lift the government's fertiliser and LPG subsidy outgo, while weighing on corporate tax collections, refining margins and dividend receipts.

Impact on India's Fiscal Position:

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• The surge in global crude oil and natural gas prices amid the West Asia conflict is likely to complicate India's fiscal position in FY2027, potentially increasing subsidy burdens and pressuring revenues.
• ICRA estimates that the government may use the Economic Stabilisation Fund (ESF) to absorb part of the fiscal shock, along with measures such as front-loading subsidy payments and seeking supplementary grants later in the year.

Risks and Mitigation Measures:

• While buffers such as the ESF, front-loading subsidy payments, and expenditure savings may limit any major slippage from the fiscal deficit target of 4.5% of GDP, risks remain skewed to the upside if elevated energy prices persist due to a prolonged conflict.
• ICRA believes that the government can front-load subsidy pay-outs in H1 FY2027 and announce supplementary demand for grants (SDG) later, if needed, to mitigate the impact of the fiscal shock.

Energy Price Projections:

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• As of March 23, international prices of crude oil stood at USD 157 per barrel for the Indian basket and USD 104 per barrel for Brent.
• Liquified natural gas prices have also surged to USD 22 per million British thermal unit.

Upside Risks to Fiscal Deficit Target:

• If the conflict keeps energy prices elevated for a prolonged period, it would pose upside risks to the central government's FY2027 fiscal deficit target of 4.5% of GDP (as per 2022-23 GDP series).