India’s FY27 fiscal deficit target faces oil price risks amid Iran war: ICRA

Elevated global energy prices linked to geopolitical developments in West Asia could put pressure on India’s fiscal position in FY27, although available buffers are likely to help manage the impact, according to a report by ICRA.

"Elevated global crude oil and natural gas prices amid ongoing developments in West Asia may influence the Government of India's fiscal position for FY2026-27," ICRA said in the report, according to ANI. It pointed to rising uncertainty in global markets as energy prices remain volatile due to the geopolitical situation.

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The Indian goverment today also slashed special additional excise duty on petrol and diesel by Rs 10 per litre. “Government has taken a huge hit on it taxation revenues to ensure very high losses of oil companies (approximately 24 Rs/litre for petrol and 30 Rs/litre for diesel) at this time of sky high international prices are reduced,” Petroleum and Natural Gas Minister Hardeep Puri wrote on X.

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Volatility in global markets raises fiscal concerns

ICRA said recent increases in energy prices, driven by geopolitical factors, have introduced volatility in global markets and may require adjustments in fiscal planning. "Even if the situation stabilises, energy prices are expected to remain higher than earlier budgeted assumptions, which may require fiscal adjustments," the report said.

Higher crude oil and natural gas prices could push up subsidy requirements, especially for fertilisers and liquefied petroleum gas. "Higher crude oil and natural gas prices may lead to an increase in subsidy requirements, particularly for fertilisers and liquefied petroleum gas (LPG)," it said.

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Revenue pressures and sector impact

The report also pointed to possible pressure on the revenue side, saying elevated energy prices could affect government income. This includes the likelihood of moderation in excise duty collections as well as corporate tax inflows.

ICRA said supply-side disruptions are also a concern. "Global supply disruptions and logistical challenges have contributed to the increase in energy prices, which could impact various sectors, including petroleum and fertilisers," t said. These disruptions could add to cost pressures across industries.

Buffers seen cushioning the impact

Despite the challenges, the agency said the government has several tools to manage the situation. "Multiple buffers are available to manage the impact," the report said, referring to mechanisms such as the Economic Stabilisation Fund, expenditure savings and flexibility through supplementary demand for grants.

It added that expenditure savings seen in recent years and the possible carry-forward of higher small savings collections could provide additional fiscal space. Lower redemptions and adjustments in market borrowings may also offer some support.

India's fiscal deficit target still within reach

On the outlook for FY27, ICRA said these buffers could help limit any deviation from fiscal targets. "These buffers may help contain any significant deviation from the fiscal deficit target of 4.5 per cent of GDP for FY2026-27," the report said, while adding that the outcome will depend on how long elevated energy prices continue.

The report said fiscal management will need a calibrated approach, including the timing of subsidy payouts and the use of available tools to respond to changing global conditions.

Overall, ICRA said that while global energy price trends remain a key factor shaping fiscal outcomes, the presence of buffers provides resilience to manage potential pressures.

(With ANI inputs)