The Centre’s move to carve out a ₹1 lakh crore Economic Stabilisation Fund from current year’s Budget is timely. The Finance Ministry has also done well to draw up various scenarios on the impact of the war, now in its third week, and place these before Parliament. As for the first, the Fund will be created out of cash inflows as well as unspent allocations (or savings) of ministries, as FY26 draws to a close in a couple of weeks.
The Fund forms part of the ₹2.8 lakh crore supplementary demand for grants passed by the Lok Sabha a few days ago. The additional ₹1.8 lakh crore is directed towards increasing subsidy on food (by ₹23,641 crore under PM Garib Kalyan Yojana) and fertilizer (by ₹19,230 crore), besides defence outlay. The additional outlay for fertilizer subsidy is likely meant to absorb a war-induced increase in prices, while food subsidy might have been beefed up to deal with any livelihood distress and inflation — a recognition that the war could hit the economy in unexpected ways.
In an exercise in realistic stocktaking, Chief Economic Advisor V Anantha Nageswaran has laid out possibilities before the Standing Committee on Finance, whose report was tabled in Parliament on Tuesday. He has said that if price of oil stays at $130 a barrel for two or three quarters, retail inflation will rise to 5.5 per cent and real GDP growth will be down to 6.4 per cent in FY27, against 7.4 per cent this fiscal. Significantly, the current account deficit (CAD) will rise from the present level of 1.2 per cent to 3.2 per cent of GDP and the fiscal deficit from 4.4 per cent to 5.6 per cent. At $90 a barrel for a sustained period, however, the current projections of 7-7.4 per cent growth, 2 per cent inflation, a CAD of 1-1.2 per cent of GDP and a fiscal deficit of 4.4 per cent are likely to hold. A spike in CAD will pose major challenges to monetary authorities as well. It could occur on account of an impact on remittances, investments and exports, even as imports rise. But it appears that the Centre is in a position to absorb crude price increase up to $90 a barrel without passing it on to the consumer, the Fund working as a cushion.
The war will have stagflationary impact. Besides higher commodity prices for industrial oil and gas users, inputs and intermediates will turn costly. Exporters and MSMEs, generally speaking, can be hit by global headwinds and disruption of supply chains and working capital finance. Apart from controlling energy prices, the Centre can take a leaf out of the Covid playbook and roll out an emergency credit guarantee scheme. The Fund’s corpus can be enhanced if required, to stabilise prices and provide credit support. Monetary policy will have to be accommodative to the extent possible. With good macros and reserves, there is every reason to believe that the worst-case scenario may not come true, even if one is prepared for it.
Published on March 17, 2026