What $100 oil could mean for India’s growth, inflation and deficit

Persistently high global oil prices could put pressure on India’s external balance and government finances if they remain elevated for a prolonged period, economists have said, as the Iran war raises oil import costs and increases the subsidies needed to keep key commodities affordable.

India is considered among the most vulnerable economies to a global oil shock because it imports nearly 90% of its crude requirements and about 50% of its gas requirements. More than half of its crude imports come from the Middle East, where export flows have been disrupted by the U.S.-Israeli war on Iran. India’s current oil stocks are estimated to cover only 20 to 25 days of demand.

Gas supply shortages have already begun affecting industries and consumers, while Iran has threatened a protracted conflict and oil prices of $200 per barrel.

If oil prices average $100 a barrel for close to 12 months, economists say the South Asian nation could face slower economic growth and higher inflation.

A prolonged crisis could widen the country’s current account deficit, weaken the rupee and push up inflation, the government said in its monthly report last week.

Current account deficit pressure

The most immediate impact of higher oil prices would be on India’s current account deficit. Concerns over rising import costs have already pushed the rupee to a record low and forced the central bank to sell dollars from its reserves.

An average oil price of $100 per barrel would widen the current account deficit to between 1.9% and 2.2% of GDP in the 2026/27 financial year, up from a projected 0.7% to 0.8% of GDP, according to a note by rating agency ICRA.

India’s current account deficit was last recorded at 2% in 2022. The country’s financial year runs from April 1 to March 31.

Fiscal deficit risks

Higher oil prices could also increase the federal government’s expenditure.

According to Mumbai-based Elara Securities, government spending could rise by about 3.6 trillion rupees ($39 billion) in the next financial year if oil prices average $100 per barrel.

The government has estimated total expenditure for the next financial year at 53.5 trillion rupees in the annual budget presented in February.

A major component of additional spending would likely be fertiliser subsidies to ensure farmers continue to receive the input at affordable prices.

At an average oil price of $100 per barrel, fertiliser subsidies could rise by about 200 billion rupees, Elara Securities said. The government may also have to compensate oil marketing companies if they are asked to keep retail petrol and diesel prices low.

Although retail fuel prices in India are technically deregulated, oil companies often delay price adjustments during periods of economic strain.

The government has set a fiscal deficit target of 4.3% of GDP for the 2026/27 financial year.

If it seeks to maintain that target despite higher spending pressures, it may have to reduce long-term infrastructure expenditure that has been used to support growth and employment, Elara Securities said.

Growth and inflation outlook

India’s economy is expected to grow by more than 7% in the next financial year, following forecast growth of 7.6% for the current year.

However, if oil prices remain close to $100 per barrel through the next financial year, GDP growth could slow to 6.6% and inflation could rise to 4.1%, according to a report by the research department at the State Bank of India on March 7.

If oil prices average $130 per barrel, GDP growth could fall further to 6%, the report said.

India’s economy has been in a “Goldilocks” phase, Reserve Bank of India Governor Sanjay Malhotra said in December.

While growth has remained strong, inflation has been low, coming in at 2.75% in January, close to the lower end of the central bank’s comfort band of 2% to 6%.