By Dr. Gyan Pathak
India is clearly heading for a severe economic shock due to rise in international crude oil prices hitting at around $113 per barrel, which is far more than the country can bear, and is on the rise day after day. The macroeconomic impact of price up to $90 per barrel is considered to be tolerable.
During an oral evidence before the standing Committee on Finance, the report of which has been submitted in the parliament last week, the Chief Economic Adviser has narrated the impact of three price scenarios – $90, $110 and $130 per barrel, and the likely impact on the Indian economy. He has said the ultimate impact will depend on how long these prices remain relevant.
When the committee asked how the government plans to mitigate the “triple whammy” of surging crude prices, market volatility, and maritime delays caused by the West Asian conflict, and strategy to protect domestic fuel prices, Chief Economic Adviser said If the shock is short-lived and temporary, then even if it escalates to 130 dollar, it will not matter. So, by and large, the answers we get suggest that up to 90 dollar per barrel, the macroeconomic assumptions for2026-2027 of achieving around 7 per cent to 7.4 per cent real GDP growth, inflation remaining at or around 2 per cent, a current account deficit between 1per cent and 1.2 per cent, and a fiscal deficit being around 4.3 per cent to 4.4 percent will be feasible. Therefore, up to 90 dollar, the macroeconomic impact is almost insignificant or not relevant.
Nevertheless, the CEA said that at 130 dollar per barrel, if the price of oil remains at that level for about two to three quarters, then the macroeconomic impact is fairly significant.CPI inflation will rise towards 5.5 per cent. Real GDP growth will decrease from 7.4 per cent to 6.4 per cent. The current account deficit will increase from 1.2 per cent, where we currently are, to around 3.2 per cent. The fiscal deficit may rise from 4.4 per cent to 5.6 per cent.
These are the scenario analyses we have conducted, he said. The impact will therefore remain a function of both the level and the persistence of that level over at least two quarters or more. We will continue to fine-tune this analysis and share the results as we obtain more data and as clarity emerges about the war’s objectives and the impact it has on oil prices, the straits of harmless passage, not only for oil but also for Liquefied Natural Gas, LPG and other items that pass through the straits.
Of course, it will also have implications for remittances, etc., which is taken into account in the current account deficit. When oil reaches 130 dollar, for example, the fact that the current account deficit can reach 3.2 per cent also considers the possibility of further disturbances and impacts within the GCC countries based on Iran’s current trend of attacking them as well. So, those factors are taken into account in our scenario analysis. We will continue to fine-tune them, CEA said.
On the Rupee, the Economic Survey pointed out that notwithstanding the fundamentals, the Rupee has been impacted last year. It depreciated by about 7per cent against the US dollar. This was primarily due to two or three factors.
One major factor is the capital flows. The double tariff from the United States, both reciprocal and penal, in addition to what was happening in the stock market regarding high valuations and the lack of an AI or semiconductor play in Indian stocks in general, combined to induce uncertainty regarding FDI inflows, as investors were concerned about how to locate production in India and export to the United States with a 50 per cent tariff. That was the impact on the FDI side.
On the FPI side, valuations and the absence of AI and semiconductor play were the principal factors. Now, if the AI bubble in developed markets, as it is currently beginning to deflate, the absence of an AI play could actually turn into India’s advantage in the course of 2026-2027. From having the disadvantage of not being the first mover, we may end up achieving a second-mover advantage once the dust settles, CEA said.
Furthermore, the two major trade agreements: one with the European Union and a framework agreement with the United States, along with the Supreme Court judgment, have removed the uncertainty surrounding the high tariffs that India currently faces. Despite the strong emphasis on manufacturing by China and the excess capacity they have, the reduction of tariffs and even the Supreme Court ruling, while China has benefited significantly more than other countries, India also stands among the top three beneficiaries of the Supreme Court judgment. Consequently, CEA said that India’s relative advantage compared to Indonesia and Vietnam amounts to two to three percentage points regarding the effective weighted average customs duty that Indian exports will face in the United States.
Thus, we anticipate that once the current geopolitical situation in the Persian Gulf stabilises, these long-term developments augur well for both India’s exports and capital inflows, which will ease the pressure on the Indian Rupee in2026-2027.
As for GDP revision, CEA said that it resulted in a reduction of India’s nominal GDP by approximately Rs.12 lakh crore as of 2025-2026. We initially expected Rs. 357.1 lakh crore as of March 2026. The new revisions may leave us with Rs. 345.4 lakh crore. This, divided by the average exchange rate for 2025-2026, places us at 3.9 trillion dollar. We were at 3.9 trillion dollars last year by March 2025, but due to the revision and the Rupee exchange rate depreciation, we are still at 3.9 trillion dollar.
Last year the GDP got revised downwards to 3.75 trillion dollar. Therefore, we will be a 3.9 trillion dollar economy as of March 2026.Meanwhile, Japan’s economy is estimated to be at 4.4 trillion dollar by the end of December 2025. Hence, we will have a gap of at least 500 billion dollar compared to Japan. Therefore, becoming the fourth largest economy in 2026-2027 is not going to be easy. We will still be the fifth largest economy in 2026-2027. (IPA Service)
