Kamal Ghorui
India does not see any immediate threat to its fiscal deficit target for 2026-27 despite the financial strain from the ongoing Middle East crisis, and the government will continue to prioritise capital expenditure, according to two government sources.New Delhi had budgeted a fiscal deficit of 4.3 per cent of GDP for the financial year that began on April 1, lower than 4.4 per cent in 2025-26. According to Reuters, officials are not planning an immediate revision to that target even as the Iran war drives up crude oil prices and increases pressure on government finances.“For India to revise its budget projections, the current situation would need to persist for at least two to three months,” one of the sources said, as cited by Reuters.
Spending curbs under consideration, but roads and rail projects protected
The government is considering austerity steps, including curbs on spending by ministries that have limited capacity to use their allocated funds. However, expenditure on roads, railways and airports is expected to continue, with the Centre viewing these as crucial for growth and job creation.The second source cited by Reuters said that some of the added fiscal pressure could be offset through better subsidy targeting and savings by ministries on various schemes, adding that capital spending “remains the top priority of the government.”The Centre has budgeted capital expenditure of Rs 12.22 trillion, or about 3.1 per cent of GDP, for 2026-27, up from revised spending of Rs 10.96 trillion in the previous fiscal, as per the annual budget.
Oil shock raises risks to subsidies, excise revenues and fiscal math
The fiscal strain stems largely from rising crude oil prices after the Iran conflict pushed global energy markets higher. India has already cut excise duties to shield consumers from a full pass-through of higher fuel costs, which will hurt tax revenues.Government officials said that spending on fertiliser and petroleum subsidies, budgeted at Rs 1.83 trillion for 2026-27, is likely to rise as commodity prices remain elevated.One source said the government is unlikely to fully pass on higher crude prices to consumers, partly due to political opposition from states. This makes a sharp rise in pump prices unlikely, especially with four major states going to the polls between April 9 and April 29, three of them ruled by opposition parties.
Economists warn of slippage if fuel prices stay capped
Economists have already begun flagging risks to the fiscal roadmap. Standard Chartered expects a fiscal slippage of 0.7 to 0.9 percentage points of GDP if oil pressures persist.Speaking to news agency ANI, PwC India partner and economic advisory leader Ranen Banerjee warned that keeping pump prices unchanged despite rising crude costs may become difficult to sustain.“They’re holding on to the pump prices of fuel. I think that is a little unsustainable given the situation that we are in. And if that is not passed on very soon to the consumers, then the fiscal deficits will see a significant bump up,” Banerjee said.He said the government may soon face a difficult choice: either allow the fiscal deficit to overshoot its budgeted level or risk pressure on capital expenditure allocations.Banerjee also said that rising fertiliser prices could add to subsidy stress, while higher oil import costs are widening the current account deficit and weighing on the rupee.
Crude surge compounds pressure as war enters sixth week
The Middle East conflict has now entered its sixth week, with crude oil prices rising sharply from around $70 a barrel before the war to nearly $110 per barrel.While retail fuel prices have remained largely stable, oil marketing companies are absorbing much of the cost burden.Banerjee said that if the conflict ends soon, trade flows could normalise within three to four months, although oil prices may remain elevated for longer, keeping pressure on public finances and the broader economy.
