Iran conflict may disrupt India’s fiscal math; LPG subsidy bill seen rising: ICRA

The ongoing conflict in West Asia could complicate the Union government’s fiscal calculations for FY2027, with rising crude oil and energy prices likely to increase subsidy burdens and reduce revenues, according to a report by rating agency ICRA. The report warned that even if tensions ease in the near term, energy prices may remain above the levels assumed in the Budget 2026, putting pressure on the government’s plan to keep the fiscal deficit at 4.5% of GDP.

ICRA said global crude oil and gas prices have surged sharply due to supply disruptions and logistical uncertainties linked to the conflict. Brent crude has climbed close to $100 per barrel, while the Indian basket has risen even higher, crossing $125 per barrel in March. Elevated energy prices could raise the cost of imports, increase subsidy requirements, and affect tax collections, thereby complicating the government’s fiscal math for the next financial year.

Subsidy expenditure

One of the biggest concerns highlighted in the report is the likely increase in subsidy expenditure, particularly on fertilisers and LPG. India depends heavily on imports for fertiliser inputs, and higher global prices could push the fertiliser subsidy bill to around ₹2.1 trillion in FY2027, nearly ₹400 billion higher than the budgeted level. Higher gas prices also raise the cost of domestic fertiliser production, adding to the pressure on government finances.

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The report also flagged a rise in LPG under-recoveries as a key risk. Due to higher international LPG prices and supply shortages, oil marketing companies may incur losses on domestic sales, which could require additional government support. ICRA estimates that LPG under-recoveries could reach around ₹200 billion in FY2027, increasing the fuel subsidy burden beyond the budgeted allocation.

Petrol and diesel prices

Higher crude prices could also force the government to reconsider fuel taxes. If petrol and diesel prices are kept unchanged despite rising input costs, the Centre may have to cut excise duties to protect consumers and compensate oil marketing companies. According to ICRA’s estimates, a cut of ₹3 per litre in excise duty on petrol and diesel could reduce government revenue by about ₹450–500 billion in FY2027.

Apart from higher spending, the report noted that elevated oil prices may also affect government income. Lower profitability of downstream oil companies could reduce corporate tax collections and dividend payouts, while broader economic stress may impact overall tax revenues. This could make it harder for the government to meet its revenue targets.

Buffers available

Despite these risks, ICRA said the government has some buffers that may help limit the fiscal impact. The Economic Stabilisation Fund, higher small-savings collections, and expenditure savings from other ministries could provide room to absorb part of the shock. Lower market borrowings and the possibility of supplementary allocations later in the year may also help manage the situation.

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However, the agency cautioned that these buffers may not be sufficient if the conflict continues for a prolonged period. Sustained high energy prices could lead to higher subsidies, lower revenues, and additional borrowing, increasing the risk of the fiscal deficit exceeding the target.

ICRA said the duration of the West Asia conflict remains uncertain, and a prolonged disruption in energy markets would remain a key risk for India’s fiscal position in FY2027.