How Persistently High Oil Prices Could Impact India's Vulnerable Economy

India's external balance and government finances could be hit if oil prices stay high for an extended period, economists have said, as the Iran war pushes up oil import costs and the subsidies needed to keep key commodities affordable.

India is considered to be among the most vulnerable to a global oil shock as it imports nearly 90% of its crude requirements and about 50% of its gas requirements. Over half of its crude is from the Middle East, where export flows have been disrupted by the U.S.-Israeli war on Iran, and India's current oil stocks are only enough to cover 20 to 25 days.

Gas supply shortages have already begun hitting industries and consumers, and Iran has threatened a protracted conflict and $200 per barrel for oil.

If oil prices average $100 a barrel for close to 12 months, the South Asian nation could also see growth fall sharply and inflation rise.

A prolonged crisis could widen the country's current account deficit, weaken the rupee and stoke inflation, the government said in its monthly report last week.

CURRENT ACCOUNT DEFICIT

The most immediate impact would be on India's current account deficit. This concern has pushed the rupee to a record low and forced the central bank to sell dollars from its reserves.

An average price of $100 a barrel would widen the current account deficit to 1.9%-2.2% of GDP for the 2026/27 financial year, from a projected 0.7%-0.8% of GDP, rating agency ICRA said in a note.

India's current account deficit was last at 2% in 2022. Its financial year runs from April 1 to March 31.

FISCAL DEFICIT

The federal government's annual expenditure could also rise by 3.6 trillion rupees ($39 billion) in the next financial year if oil prices hold at an average of $100 per barrel, according to Mumbai-based Elara Securities.

The government's total estimated expenditure for the next financial year is 53.5 trillion rupees, according to the annual budget presented in February.

A key expense would be higher subsidies for the fertiliser sector to ensure farmers have the key input at affordable costs.

At an average price of $100 a barrel, fertiliser subsidies could rise by 200 billion rupees, Elara Securities said, and the government might also need to compensate oil marketing companies if they are asked to keep retail petrol and diesel prices low.

While retail fuel costs are technically deregulated in India, oil companies tend to delay price adjustments in times of economic strain.

The government is targeting a fiscal deficit of 4.3% of GDP for the 2026/27 year.

If it chooses to maintain that deficit, it may have to cut long-term infrastructure spending being used to boost growth and jobs, Elara Securities said.

GROWTH AND INFLATION IMPACT

The Indian economy is expected to grow at more than 7% in the next financial year, on top of growth of 7.6% forecast for the current year.

If oil prices hold near $100 per barrel through the next financial year, GDP growth could fall to 6.6% and inflation could rise to 4.1%, the research department at the State Bank of India said in a report on March 7. If oil prices average $130 per barrel, GDP growth could plummet to 6%, it said.

India's economy has been in a "Goldilocks" phase, Reserve Bank of India Governor Sanjay Malhotra said in December.

While growth has been strong, inflation is low - coming in at 2.75% in January, close to the lower end of the central bank's comfort band of 2%-6%.

($1 = 92.0000 Indian rupees)

Also read: Rupee Hits 92.37 Record Low; RBI Intervenes Amid $100 Oil & War Panic