India's external balance and government finances could be severely impacted if oil prices remain high for an extended period, economists warn, as the Iran war pushes up oil import costs and subsidies needed to keep key commodities affordable.
The country is highly vulnerable to a global oil shock, importing nearly 90% of its crude requirements and about 50% of its gas requirements, with over half of its crude coming from the Middle East where export flows have been disrupted.
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, India could see growth fall sharply and inflation rise, with the current account deficit widening to 1.9%-2.2% of GDP for the 2026/27 financial year.
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 Elara Securities.
The government's total estimated expenditure for the next financial year is 53.5 trillion rupees, and higher subsidies for the fertiliser sector could rise by 200 billion rupees, Elara Securities said.
The Indian economy is expected to grow at more than 7% in the next financial year, but 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 State Bank of India said.
