If the war ends soon, the damage to the economy in FY27 can still be contained | Photo Credit: V RAJU

The new financial year begins on an uncertain note. An economy that imports 85 per cent of its oil will surely be hit by a prolonged price and supply shock. The most important question is how long this will last. Four crucial macro variables — trade deficit, current account deficit, growth and inflation — will come under stress if the shock continues well into the first quarter. These variables also influence each other. India’s fundamentals remain robust, but real shocks can also be amplified by financial actors. The Reserve Bank of India will have to be ahead of the game.

The latest Monthly Economic Review has said that FY27 will see a higher trade deficit and CAD. The extent of rise would depend on how long this shock lasts — even as demand management can keep these parameters under check. The pass through of imported inflation will send the right market signals to curb demand and the two external deficits. The pain to be borne is inescapable; the Centre needs to act thoughtfully on distributing this between households, governments and businesses. The trade deficit is already slated to be in the region of $350 billion in FY26, or 10 per cent of GDP, against 7.5 per cent of GDP in FY25. This trend may continue, if the crisis does not abate. A dire scenario is one where oil prices remain elevated at over $100-120 a barrel well into the year. This would mean an additional outgo of about $45 billion on oil imports for six months, pressurising the rupee and the deficits further at current levels of demand.

These are worst case scenarios. While price pass-through makes sense, it could exacerbate inflation as well as inflation expectations beyond a point, hurting both supply and demand. That said, there is not much fiscal space for the government to absorb these losses, with total debt of Centre and States at about 85 per cent of GDP. Fiscal deficit will expand if the Centre is forced to compensate the oil companies for holding retail prices or not fully passing on the increased crude oil costs — fuel prices have been steady in the first month of the war and will likely be so until state elections are completed in the end of April. A demand compression in the event of a prolonged price and supply shock may result in higher outlays for the Economic Stabilisation Fund.

Meanwhile, many Budget assumptions may not hold. Tax collections could come under pressure if overall industrial activity is hit due to scarcity or high price of raw materials, and this is not an unlikely scenario.. Fertilizer subsidies are bound to overshoot the budgeted sum of ₹1.7 lakh crore for FY27. Analysts estimate a ₹25,000 crore increase in subsidy if the crisis persists. Adding to the problems is the prediction of El Nino setting in this monsoon year which mean the rural sector will need support. LPG subsidy of about ₹12,000 crore projected for the new fiscal might need an upward revision. A rise in the fiscal deficit by even 100 basis points cannot be ruled out, not least because of growth compression. The best part, though, is that this is just the start of the fiscal year. If the war ends soon, the damage to the economy in FY27 can still be contained.

Published on April 1, 2026