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Informist, Friday, Mar. 6, 2026

 

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--Fin min: Some states' poor fiscal health may hit growth amid external woes 
--Strain from high crude prices only if prices sustain above $100/bbl 
--May have to find, reprioritise fiscal resources in coming years 
--West Asia conflict implications for India may be long-lasting 
--West Asia conflict implications for India significant 
--See real GDP growth of 7.0-7.4% in FY27 
--Prolonged West Asia crisis can hit fertilisers, petrochem sectors 
--Prolonged West Asia crisis can hit LNG, crude dependent sectors 
--Subdued capital flows could put pressure on rupee 
--If West Asia crisis persists, it can stoke inflationary pressures 
--If West Asia crisis persists, it can hit rupee, CAD 
--India can ensure domestic energy security despite high oil prices 
--India can effectively mitigate impact of rising crude oil prices 
--India may become world's 4th largest economy in FY28
 

 

NEW DELHI – A prolonged crisis in West Asia could have material implications for the rupee's exchange rate and the country's current account deficit and may also stoke inflationary pressures, the finance ministry said Friday. The US-Israel strikes on Iran on Feb. 28 have disrupted shipping through the Strait of Hormuz, pushing up global crude oil prices, the ministry said in its Monthly Economic Review for February.

 

India currently faces geopolitical risks after Israel and the US launched joint military strikes on Iran Saturday, prompting retaliation from Tehran. Iran's Supreme Leader, Ayatollah Ali Hosseini Khamenei, and several of the country's top military leaders were killed in the first wave of attacks by Israel and the US. Iran has since retaliated against Israel and also targeted US military installations around the Persian Gulf.

 

The retaliatory threats from Iran have disrupted shipping through the Strait of Hormuz, the world's most critical oil chokepoint handling 20% of global oil flows, and damages to key energy infrastructure assets in West Asia mark a pivotal escalation echoing the 1991 Gulf War oil shocks, potentially reshaping global energy geopolitics for decades, the report said. The conflict has already driven Brent crude oil up around 9% to near $80 per barrel and liquefied natural gas prices around 50%, it said.

 

"Despite the country's high import dependency on crude oil, it has sufficient foreign exchange reserves, a low CAD and low inflation rates, which collectively allow it to effectively mitigate the impacts of rising global crude oil prices and ensure domestic energy security, the ministry said. The report, however, cautioned that subdued capital flows, accentuated by a flight to safety, could put pressure on the currency. "Some sectors dependent on LNG and crude, like fertilisers and petrochemicals, could be affected if the crisis is prolonged." 

 

The implications of this conflict for India are significant and may be longer-lasting in ways that are not immediately understood, the report said. It said maintaining steady growth and macro and financial stability become paramount considerations for policy, as stability itself will be at a premium globally.

 

"The last few days since the Gulf conflict erupted have once again underscored the importance of natural resource buffers in the coming years. Fiscal resources have to be found, and hence reprioritisation may be necessary in the coming years," the ministry said. The ministy's scenario building exercises on the macroeconomic impacts of higher oil prices suggest that crude oil prices must remain above $100 per barrel for a sustained period for macroeconomic aggregates to reflect the strain.

 

As tensions escalated in West Asia, crude oil prices climbed sharply, breaching $89 a barrel from less than $70 a barrel on Feb. 27, before the attack happened. For India, which imports over 85% of its crude oil, a rise in oil prices threatens higher inflation and higher trade deficit.

 

The report also said that due to the depreciation of the rupee in 2025-26 (Apr-Mar) and the decline in the nominal GDP value from INR 357.1 trillion to INR 345.5 trillion, the Indian economy may likely become the world's fourth-largest economy in FY28. It raised the real GDP growth forecast for financial year FY27 to 7.0-7.4% from 6.8-7.2% projected in the Economic Survey for FY26.

 

Compression of GDP in nominal terms in the new series translates the 4.4% fiscal deficit target for FY26 to 4.5%. The fiscal deficit for FY27, now projected at 4.3%, would amount to 4.46% of projected GDP, assuming the same nominal GDP growth rate of 10%, the report said.

 

The report warned against complacency on strong macroeconomic performance and said that the future has become that much more uncertain, with every indication that it will remain so for quite some time to come. "If and when growth is buffeted by external developments, long-standing issues such as urbanisation, air and water pollution, unbalanced economic development of states and the unsustainable fiscal health of some of them may emerge as more binding growth constraints than before," it said.  End

 

US$1 = INR 91.74

 

Reported by Sagar Sen

Edited by Avishek Dutta

 

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