Crude prices have more than doubled from pre-crisis levels, raising input and logistics costs and disrupting supplies, including key fertiliser inputs, the agency said.
This could lift the government’s fertiliser and LPG subsidy outgo while weighing on corporate tax collections, refining margins and dividend receipts.
ICRA said the government may use the Economic Stabilisation Fund to absorb part of the fiscal shock, along with measures such as front-loading subsidy payments and seeking supplementary grants later in the year.
While these buffers could help limit any major slippage from the fiscal deficit target of 4.5 per cent of GDP, risks remain skewed to the upside if elevated energy prices persist due to a prolonged conflict, it added.
“Amid the ongoing geopolitical conflict in the West Asia region, global crude oil and natural gas prices have surged and displayed considerable volatility owing to supply and logistical disruptions in the region, with the former more than doubling compared to pre-crisis levels.
“This complicates the Government of India’s (GoI) budget math for FY2027, vide a potential rise in the fertiliser and fuel subsidy burden, lower excise collections in the event of a cut in excise duty to compensate Oil Marketing Companies (OMCs) for marketing losses and an adverse impact on corporate tax revenues,” it said. ICRA believes that the Economic Stabilisation Fund (ESF) could be utilised to absorb a portion of the aforesaid revenue/expenditure shock to the GoI’s fiscal situation.
Besides, the GoI can front-load subsidy pay-outs in H1 FY2027 and announce supplementary demand for grants (SDG) later, if needed, that could be partly absorbed by the typical expenditure savings seen in recent years.
These buffers may prevent a large overshooting in the government’s fiscal deficit target of 4.5 per cent of GDP (based on the 2022-23 GDP series), although sizeable upside risks could emerge if the ongoing conflict persists for a prolonged period, keeping crude oil and natural gas prices elevated, beyond our current baseline forecasts.
ICRA said the West Asia conflict has pushed up the international prices of crude oil (USD 157 per barrel and USD 104 per barrel for Indian basket and Brent, respectively, on March 23) and liquified natural gas (USD 22 per million British thermal unit) to elevated levels, while also disrupting supplies, including those of key inputs for fertiliser production.
“This may have direct implications for the fertiliser and petroleum industries, including the surge in input and logistical costs, reducing refining margins of downstream players, albeit augur well for upstream oil companies,” ICRA said.
Besides, ICRA expects modest upside to small savings collections in FY2026 over the revised estimate (RE), which can be carried forward to FY2027, along with the typical expenditure savings of Rs 1.8 trillion/annum on average seen during FY2019-2025 would provide some buffer.
If the conflict keeps the energy prices elevated for a prolonged period, it would pose upside risks to the central government’s FY2027 fiscal deficit target of 4.5 per cent of GDP (as per 2022-23 GDP series).