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Informist, Monday, Apr. 6, 2026

 

By Priyasmita Dutta

 

NEW DELHI – The Economic Stabilisation Fund, set up by the finance ministry recently, will provide room to meet the government's fiscal deficit target for 2026-27 (Apr-Mar) even if the expenditure rises on account of the war in West Asia, a senior finance ministry official said. "There may be a case where the government will have to respond further if the war persists for a long time, and there will be a cost to it," the official said. "Because of the fund, we will be able to stick to the target," the official added.

 

While the Budget pegged FY27 fiscal deficit at 4.3% of GDP, the government now sees it at 4.5% of GDP, following a downward revision in India's nominal GDP under the new series.  The ongoing war, which has already prompted the government to cut excise duties to prevent the pass-through of higher fuel costs to consumers, poses a risk of fiscal slippage, with pressure building on government revenues and a potential rise in expenditure. 

 

"The Economic Stabilisation Fund will allow the government to dip into it," the official told Informist. "I don't see a need to touch the fund immediately, but it is an option that will help us keep the fiscal deficit contained," the official said. 

 

The government set up the Economic Stabilisation Fund to meet expenditure arising from uncertain geopolitical conditions, Finance Minister Nirmala Sitharaman had said in the Lok Sabha in March. The government has set a corpus of INR 1 trillion, funded through a combination of a cash outlay of INR 573.81 billion in FY26 and reallocation of funds from savings in other departments. 

 

The war in West Asia, which began on Feb. 28, has increased India's exposure to energy and price shocks, given New Delhi's dependence on the region for crude oil and liquefied petroleum gas supplies. Crude oil prices, a key determinant of government subsidies, have soared since the war broke out, rising 52% to $110.88 on Tuesday. 

 

According to the official, the government does not see the need to increase its budgetary allocation for subsidies immediately, but it may be needed in the future if the war persists. "We don't yet know how much crude will surge... what if oil companies have to be compensated or if fertiliser subsidy goes up? There is a possibility," the official said. 

 

The Budget has allocated INR 1.71 trillion for fertiliser subsidy in FY27, 8.4% lower than the revised estimate of FY26 and INR 121 billion for petroleum subsidy, down 20.1% from last year. Any increase in the subsidy allocation could impact the fiscal position. 

 

The government has taken a slew of measures to mitigate the impact of the war in West Asia, including cutting excise duty on diesel and petrol by INR 10 per litre to help oil marketing companies absorb the rise in crude oil prices. The government has also levied an export duty of INR 21.50 per litre on diesel and INR 29.50 per litre on aviation turbine fuel to ensure adequate domestic availability of the fuels. These duty changes will be reviewed by the Centre every fortnight. 

 

The government is likely to incur a fortnightly revenue loss of INR 70 billion due to the cut in excise duty on petrol and diesel, and earn INR 15 billion from export duty. Economists said the net revenue impact of the duties could be around INR 1 trillion. Madhavi Arora, chief economist at Emkay Global Financial Services, said the net fiscal cost of the excise duty cut and export duty would be INR 800 billion, while State Bank of India Group Chief Economic Adviser Soumya Kanti Ghosh put it at INR 1.11 trillion.

 

Finance ministry officials said the government will not cut capital expenditure to contain the fiscal deficit this year. "Capital expenditure is more important now than ever," a second finance ministry official said. "Beyond road, railways, and metro, the government is actively increasing spending in aviation, shipping, and ports to be better prepared to handle evolving challenges," the official said.

 

The government has projected its capital expenditure for FY27 at INR 12.22 trillion, or about 4.4% of GDP, up from revised spending of INR 10.96 trillion in FY26. 

 

The finance minister went on record last month saying the government will manage its fiscal deficit in FY27 despite the cut in excise duty on petrol and diesel. However, some experts, including Moody's Ratings, disagree. "... we expect higher expenditure commitments and weaker revenue mobilisation to constrain fiscal space and slow the pace of fiscal consolidation in the absence of offsetting revenue measures or expenditure rationalisation," the rating agency said Monday.  End

 

Edited by Saji George Titus

 

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