US-Iran war: What started as March madness for India and beyond, could very well descend into mayhem.
Resurgent tensions in the Gulf, with a month-old ceasefire between the US and Iran on the verge of collapse, sent crude oil prices spiralling yet again. The UAE had accused Iran of targeting it with missiles on Monday night and hitting its Fujairah port with drones. An oil tanker owned by the UAE’s state-owned oil company was allegedly hit by Iranian drones outside Hormuz as well.
The attacks followed US President Donald Trump’s announcement that his country would help commercial vessels find a safe passage through the Strait of Hormuz.
Brent crude oil surged to over $114 a barrel on Tuesday after prices had cooled late last week. The prices are up 25 per cent since the third week of April.
While consumers around the world are already counting the economic cost, those in India have largely been insulated from the financial jolt. From petrol pump prices to LPG and PNG lighting stoves at home to domestic jet fuel prices, not much has changed for the Indian consumer.
But, the relief is stretching the government finances to its limits. And, India is entering a dangerous new phase of economic vulnerability as the West Asia conflict sends shockwaves through global energy markets.
The finance ministry, in its latest monthly economic review, has warned that prolonged disruption in energy and fertiliser supplies could test whether India’s domestic demand resilience, policy buffers and public investment remain “adequate” under sustained global uncertainty.
From global oil shock to household pain
The first direct signs are already visible.
While domestic LPG prices have so far been protected, commercial LPG prices were raised by ₹993 on May 1, with mini cylinders also seeing sharp hikes. This means restaurants, food delivery operators, caterers and small businesses are immediately facing higher operating costs.
For consumers, this is inflation by stealth.
Even if the home kitchen remains shielded for now, eating out, ordering food, or purchasing products dependent on transportation and packaging becomes more expensive.
The finance ministry has warned that a “wide spectrum of downstream industries” relies directly on petroleum, meaning higher crude prices can spread input cost pressures across sectors ranging from logistics and manufacturing to FMCG and retail.
Petrol and Diesel: The fiscal buffer at breaking point
India’s fuel retail prices have remained relatively stable largely because the government and state-run oil marketing companies are absorbing the shock.
The past two months have seen Pakistan raising petrol prices to PKR 400 a litre from PKR 280. Singapore has hiked prices from SG$2.40 to nearly three and a half dollars. Malaysia has raised petrol prices by nearly 70% in two months. Even Japan has raised prices by around 20%
India, meanwhile, has kept the rates constant through the Iran war storm.
The consumer may be shielded but according to ICRA, high crude prices could translate into under-recoveries of ₹12–₹14 per litre on petrol and ₹16–₹18 per litre on diesel.
This creates a dangerous policy crossroads with the government facing two difficult choices - provide a massive compensation package or subsidy support to oil companies or allow pump prices to rise sharply.
The Expenditure Secretary has already acknowledged that FY27 may be “very difficult to envisage,” with multiple fiscal stress points emerging simultaneously.
Fiscal deficit risks are rising fast
The government had budgeted a fiscal deficit target of 4.3% of GDP for FY27, but revised nominal GDP assumptions have already pushed that closer to 4.5%.
Now add lower excise collections due to fuel tax cuts, potential oil company compensation, rising LPG subsidy burdens and ballooning fertiliser subsidy.
The result is mounting fiscal slippage risk.
Every rupee spent suppressing inflation today could reduce future spending room for infrastructure, welfare or growth-oriented capital expenditure.
This is particularly critical because India’s macroeconomic credibility has increasingly relied on fiscal prudence in recent years.
Fertiliser Subsidy: The hidden threat beneath the soil
Perhaps the least visible but potentially most explosive pressure point lies in agriculture.
India’s fertiliser subsidy for FY27 was budgeted at ₹1.71 lakh crore. But senior government officials now estimate it may rise by ₹35,000 crore in a moderate stress case and a whopping ₹50,000 crore if current volatility persists.
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The reason is simple - fertiliser production depends heavily on imported liquefied petroleum gas and global energy-linked inputs.
This matters because high fertiliser costs eventually threaten agriculture profitability, crop pricing and ultimately, food inflation.
The monsoon variable could make it worse
The finance ministry has also flagged another major domestic risk: weather.
A below-normal monsoon or El Niño event combined with expensive fertiliser and energy could create a perfect inflationary storm.
Poor kharif output would intensify food prices precisely when imported inflation is already elevated.
This would transform inflation from merely imported energy inflation into broad-based cost-push inflation, where businesses across the economy pass on rising costs to consumers.
FMCG, manufacturing and retail are next in line
The corporate sector is already bracing for the ‘crude’ fallout with higher costs impacting packaging materials, chemicals, synthetic inputs, freight, tyres and consumer goods manufacturing.
Large consumer companies such as Hindustan Unilever have already signalled that crude-linked commodity inflation is increasing.
This means soaps, detergents, packaged foods and essential goods may all become costlier.
For households, the pain may move from the petrol pump to the ‘kirana’ store.
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Rupee weakness could amplify every shock
The Indian Rupee has weakened by more than 500 paise against the US Dollar in the past two months.
Not only has this added to fiscal stress but also considerably eroded investor sentiment. The Finance Ministry says the conflict has “seriously dented” investor confidence, disproportionately impacting developing economies.
A weakening rupee increases the landed cost of imports, especially crude, gas and industrial inputs. And, creates a vicious cycle: Higher crude → weaker rupee → costlier imports → more inflation.
Even if global prices stabilise somewhat, rupee depreciation can preserve domestic inflation pressure.
Growth Outlook: From optimism to uncertainty
India delivered 7.6% GDP growth in FY26, and expectations for FY27 were in the 7–7.4% range. But, the the macro picture is changing rapidly.
The Finance Ministry concedes that growth estimates are now "clouded by an altered macro-outlook" in the wake of the West Asia war.
The IMF also warns that growth risks are tilted sharply downward while inflation risks are tilted upward.
If crude averages near $120 and subsidy pressures intensify, India could face the dangerous combination of slower growth and higher inflation. This could drive the economy into classic stagflationary territory – one of the hardest macroeconomic scenarios for policymakers.
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The Bottom Line: How long can the lid stay on?
India’s economic managers are currently in a sophisticated balancing act – shielding consumers, controlling inflation, protecting fiscal credibility and encouraging growth.
For now, the government has prevented a visible consumer shock.
But every buffer has a cost.
If crude remains elevated, fertiliser subsidies balloon, under-recoveries deepen and the rupee weakens further, the pressure cooker may no longer be containable.
The immediate question for millions of Indians is no longer whether global war affects them. It is: When will the rising pressure finally reach their kitchen, commute, grocery bills and livelihood?
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