Rising Crude Oil Prices Near $120 Threaten Indian Economy as Subsidy Burdens Mount

With Brent crude nearing $120 per barrel due to escalating Saudi-Houthi tensions, the Indian economy faces growing headwinds. While higher fuel prices pose clear challenges, economists suggest that existing macroeconomic tailwinds could help government finance managers mitigate the pressure.

The Union Budget had initially estimated the fertilizer subsidy at ₹1.70 lakh crore. However, data from the Controller General of Accounts (CGA) shows that the outgo has already crossed ₹1.03 lakh crore in the first five months alone. Reports quoting senior government officials indicate that the total outgo could surpass ₹3 lakh crore or reach ₹3.5 lakh crore. Meanwhile, despite upward revisions in domestic LPG cylinder prices, under-recoveries remain at approximately ₹327 per cylinder.

According to D.K. Srivastava, Chief Policy Advisor at EY India, crude prices are likely to stay elevated between $115 and $120 per barrel for some time amid the ongoing crisis in West Asia. This trend is expected to adversely impact real GDP growth and increase CPI inflation. The Reserve Bank of India's (RBI) projections for the second half of 2026-27 were originally built on a baseline crude assumption of $95 per barrel.

Srivastava noted that a sustained $20 per barrel increase in global crude prices above the baseline could marginally lower real GDP growth for 2026-27 from 7.1 percent to 7.0 percent, while lifting CPI inflation from 5.2 percent to 5.7 percent. At the same time, nominal GDP growth would increase, which could positively impact the government's tax revenues if existing tax buoyancies hold.

Sunil Kumar Sinha, Professor of Economics at the Institute for Development and Communication, estimated that the rise in fertilizer subsidies could widen the 2026-27 fiscal deficit by 0.4 to 0.5 percent of GDP. Nevertheless, several channels remain available to cushion this impact.

Sinha pointed out that the RBI has transferred a bumper dividend of ₹2.87 lakh crore, tax collections have shown strong growth of nearly 13 percent by mid-September 2026, and disinvestment and asset monetization are performing well, having realized close to 70 percent of their full-year targets by the end of August 2026. Additionally, the availability of a ₹1 lakh crore economic stabilization fund, created specifically to absorb global macroeconomic shocks, supports the outlook. Consequently, Sinha stated that the fiscal deficit target of 4.3 percent of GDP remains achievable, with potential slippage unlikely to exceed 4.4 to 4.5 percent of GDP.

D.K. Pant, Chief Economist at India Ratings & Research, maintains a cautiously optimistic stance. While acknowledging the impact of higher fuel prices, oil marketing company under-recoveries on petrol, diesel, and LPG, and elevated fertilizer subsidy outlays, Pant believes overall fiscal arithmetic will remain largely stable due to steady tax receipts, non-tax revenues, and collections from disinvestment and asset monetization exceeding budget estimates.

"External macroeconomic shocks such as surging global crude prices present immediate operational hurdles for both state finances and the broader corporate ecosystem, including startups and MSMEs managing input costs. However, resilient domestic tax collections, strong monetization progress, and proactive economic stabilization buffers provide a necessary safety net. For businesses navigating this volatile period, maintaining tight financial discipline and closely monitoring inflationary pressures will be critical to sustaining long-term growth amidst shifting fiscal realities." — Dr. Shishir Gupta, Founder & CEO, StartupLanes