Crude oil price surge amid West Asia stand-off may strain fiscal deficit, current account: Finance ministry

Despite heightened global uncertainties, the ministry said the country’s economic outlook remains underpinned by resilient domestic fundamentals, continued policy support, and strengthening structural drivers of growth. “Structural reforms of the last decade and infrastructure investments are contributing to growth resilience as is evident in the data for the months of March to June 2026,” the review stated.

On the external sector front, the ministry said strong export performance, a sustained services surplus and robust remittance inflows have supported the current account, while recent policy measures are expected to strengthen capital inflows in the coming months. Along with comfortable foreign exchange reserves, these developments are expected to help preserve external sector stability amid an uncertain global environment, it said.

To achieve long-term resilience and strategic leverage, swifter policy responses and their implementation are vital to encourage foreign and domestic investment in the Indian economy, it said. “Global developments related to AI and weaponisation of supply chains in general are reminders of the distance India needs to travel to achieve long-term resilience and strategic leverage… recent years have been a time for hunkering down and battening down the hatches. Coming years will be no exception,” it said.

Commodity prices, crude oil

Commodity prices, particularly crude oil, which had declined below pre-conflict levels, have risen again this month. However, the increase remains contained compared with the sharp spike witnessed during the initial phase of the conflict, the ministry said. India’s crude oil import bill surged by over 60% on a year-on-year basis in April-June FY27 even as import volumes dipped slightly amid supply tightness and elevated prices due to the West Asia crisis and stifled energy flows through the Strait of Hormuz.

The increase in retail fuel prices in India, following the partial pass-through of higher global crude oil prices since mid-May 2026, was evident in June, with inflation in diesel, petrol and CNG further rising to 8.4%, 7.5% and 6.2%, respectively, the finance ministry said. However, the pass-through to passenger transportation services such as bus, taxi, auto-rickshaw fares remained moderate, the ministry said. Airfare inflation moderated in June after the sharp rise recorded in May, it said.

Citing a note by SBI Research on the West Asia crisis and the India’s declining oil intensity, the ministry said the country’s oil consumption-to-GDP ratio and crude oil imports-to-GDP ratio has declined from FY14 to FY26, a trend partly attributable to accelerating EV adoption and broader structural factors such as energy efficiency gains and a shift in the composition of GDP growth. Average monthly EV registrations increased to 2.3 lakh in March-June, around 1 lakh higher than the 2025 monthly average. EV penetration, which has crossed 8% of total vehicle registrations in 2026 so far, to 20% by 2030 could reduce India’s annual oil import bill by around Rs 1 lakh crore, the review said citing the SBI note.

Inflation risk

Higher commodity prices are expected to interrupt the global disinflation process, the ministry said. For India, two factors underlie current inflationary pressures — unfavourable weather conditions exerting upward pressure on food inflation and the transmission of elevated global fuel prices to the energy commodities at the retail level, it said. “While global crude price fluctuations from geopolitical events and potential El Niño weather patterns are being carefully monitored, the domestic inflation outlook remains cautious and structurally well-supported, anchored by active measures to support price stability, robust agricultural commodity procurement and targeted contingency plans in place,” it said.

Severe monsoon deficits can transmit into elevated food Consumer Price Index inflation, weakened rural demand, and fiscal pressure from higher subsidy burdens, it said. Mitigating these macroeconomic risks requires proactive food stock management, calibrated trade interventions, operationalisation of district contingency plans, promotion of drought-tolerant seeds, close monitoring of reservoir allocations, and coordinated inter-ministerial action, the ministry said.